What Is AS 19?
Accounting Standard 19 (AS 19), titled "Leases," was issued by the ICAI and prescribes, for lessees and lessors, the appropriate accounting policies and disclosure requirements for finance leases and operating leases. A lease is an agreement whereby the lessor conveys to the lessee in return for a payment or series of payments the right to use an asset for an agreed period of time.
Classification of Leases
The classification depends on whether substantially all the risks and rewards of ownership are transferred from the lessor to the lessee:
| Parameter | Finance Lease | Operating Lease |
|---|---|---|
| Risk & Reward Transfer | Substantially all risks and rewards transferred to lessee | Risks and rewards remain with the lessor |
| Ownership Transfer | May or may not transfer at end of lease | Does not transfer |
| Lease Term | Covers major part of asset's economic life | Usually shorter than asset's economic life |
| Lessee's Balance Sheet | Asset and liability both recognised | No asset or liability recognised; rent is expensed |
Indicators of a Finance Lease
A lease is classified as a finance lease if any one of the following conditions is met:
- The lease transfers ownership to the lessee by the end of the lease term
- The lessee has a bargain purchase option — option to buy at a price significantly below fair value
- The lease term covers the major part of the economic life of the asset (even if ownership is not transferred)
- The present value of minimum lease payments is substantially equal to (at least 90% of) the fair value of the leased asset
- The leased asset is of a specialised nature such that only the lessee can use it without major modifications
Accounting by Lessees
Finance Lease — Lessee
At the inception of the lease, the lessee recognises:
- An asset at the lower of the fair value of the leased asset and the present value of minimum lease payments
- A liability for the same amount
Each lease payment is apportioned between the finance charge (interest expense) and the reduction of the outstanding liability. The finance charge is allocated so as to produce a constant periodic rate of interest on the remaining balance of the liability.
The leased asset is depreciated by the lessee. If there is reasonable certainty of ownership transfer, depreciation is over the asset's useful life; otherwise, over the shorter of the lease term and useful life.
Operating Lease — Lessee
Lease payments are recognised as an expense on a straight-line basis over the lease term (unless another systematic basis is more representative). No asset or liability is recognised in the balance sheet.
Accounting by Lessors
Finance Lease — Lessor
The lessor recognises the leased asset as a receivable (not as a fixed asset) at an amount equal to the net investment in the lease. Lease income is recognised based on a pattern reflecting a constant periodic rate of return on the lessor's net investment.
Operating Lease — Lessor
The asset remains on the lessor's balance sheet and is depreciated normally. Lease income is recognised on a straight-line basis over the lease term.
Sale and Leaseback Transactions
A sale and leaseback involves the sale of an asset by the owner and the leasing of the same asset back:
- Sale and finance leaseback: Any profit on sale is deferred and amortised over the lease term — it is not immediately recognised as income because it is in substance a financing arrangement
- Sale and operating leaseback: If the sale is at fair value, profit or loss is recognised immediately. If below fair value, any loss is immediately recognised (unless compensated by future lease payments below market — then deferred). If above fair value, excess over fair value is deferred and amortised.
Disclosure Requirements
Lessee — Finance Lease
- Assets acquired under finance leases — gross carrying amount, accumulated depreciation, and net carrying amount at each balance sheet date
- Future minimum lease payments — within one year, one to five years, and beyond five years
- Total contingent rents recognised as expense
- General description of significant leasing arrangements
Lessee — Operating Lease
- Total future minimum lease payments for non-cancellable leases — within one year, one to five years, and beyond five years
- Lease payments recognised in the P&L
- General description of significant leasing arrangements
Conclusion
AS 19 ensures that leasing transactions are accounted for in a manner that reflects their economic substance — finance leases are treated as purchases on credit, while operating leases are treated as rentals. This distinction is critical for presenting a true picture of an enterprise's assets, liabilities, and financial commitments.
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