PRE AS-19 ERA Prior to 1.04.2001 the “Guidance Note on Accounting for Leases” was applicable on leasing industries. This Guidance Note was based on the matching principle i.e. the periodic costs comprising of depreciation and lease equalization charges were recommended to be matched with lease rentals so that the net income from a finance lease will show a true and fair view. For this Lease Equalization Reserve used to be created. MEANING
AS-19 does not apply to the followings:-
(a) Lease agreement for natural resources such as oil, gas, timber, metals and mineral rights. (b) Licensing agreements for items such as motion picture films, video recordings, patents, manuscripts and copyrights. (c) Lease agreement to use land.
(d) Agreements for contracts for services that do not transfer the right to use assets. Example- Use of Taxi
SOME IMPORTANT DEFINITIONS
ACCOUNTING TREATMENT IN CASE OF FINANCE LEASE
This can be explained with the help of an illustration-
Fair value of the machinery `2,35,500 Lease Term 3 years Lease Rent `1,00,000 Guaranteed Residual Value by lessee ` 17000
Implicit Rate of Interest 16% p.a. Method of Depreciation SLM
In the books of lessor-
The asset given under a finance lease is recognized as a receivable at an amount equal to the net investment in the lease. In the books of lessee-
The asset taken on lease is recognized at an amount which would be lower of fair value or P.V. of MLP from standpoint of lessee.
Liability Asset 1st year O/s Liability 2,35,500 Machinery 2,35,500 (-) Repayment of Liab. 62,320 1,73,180 (-)Depreciation 72,833 1,62,667
2nd year O/s Liability 1,73,180 Machinery 1,62,667 (-) Repayment of Liab. 72,290 1,00,890 (-)Depreciation 72,833 89,834
3rd year O/s Liability 1,00,890 Machinery 89,834 (-) Repayment of Liab. 83,860 17,030 (-)Depreciation 72,834 17,000
A lease other than a finance lease or where indicators of finance lease do not exist, such type of lease shall be classified as operating lease.
INDICATORS OF OPERATING LEASE
Short term lease
Where lease does not transfer substantially all the risks and rewards incidental to ownership. Where cost of maintenance, taxes and insurance are to incurred by the lessor. Where the lessee is protected against the risk of obsolescence.
Accounting treatment for operating lease:-
From Lessee’s point of view
Lease rental paid/payable by lessee should be recognized as an expense on systematic basis. Systematic basis means an expense should be recorded as and when benefits are availed. When systematic basis cannot be identified then straight-line method is used for recording the expenses. From Lessor’s point of view
Lease rental received/receivable by lessor should be recognized as an income on systematic basis. If same cannot be identified then straight-line method is used for recording the incomes. SALE AND LEASEBACK TRANSACTIONS
A sale and leaseback transaction involves the sale of an asset by the vendor and leasing of the same asset back to the vendor.
Whenever SLB is of financial nature, any gain/loss on sale should be deferred and amortized over the lease term...
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