This document provides an overview of lease accounting standards under US GAAP, IAS, and AS 19. It defines key lease classifications such as operating and finance leases. For operating leases, it outlines the accounting treatment for lessees and lessors. For finance leases, it discusses how lessees should recognize assets and liabilities, and how lessors account for the transactions. It also covers sale and leaseback transactions and treatment of residual values under various standards.

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Welcome
to a presentation on
Lease Accounting
By
GRK Murty

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What defines Lease Accounting?
• Choice of accounting
method hinges on the
nature of leasing

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Criteria for Classification
• Lease is non-cancelable
• Agreement specifies ownership
transfer
• Contains BPO
• Non-cancelable lease term is equal to
75%of EEL of asset
• PV of minimum lease payments is
equal to or greater than 90% of the
fair value of the asset.

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Operating Lease (At each of the
payment dates) USGAP
• Neither an asset nor an obligation
is recorded
• Lessee
• Prepaid rent
– Cash
• Lessor
• Cash
– Unearned rent

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Operating Lease (At the end of
each year) USGAP
• Lessee
• Rent Expense
– Prepaid rent
• Lessor
• Unearned rent revenue
– Rent revenue
• Depreciation expense
– Accumulated depreciation

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AS - 19
• is not applicable to
– Lease agreements to explore for or
use natural resources
– Licensing agreements for items
such as motion picture films,video
recordings, manuscripts, Patents,
Copy rights
– Lease agreements to use lands

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Operating Lease (AS19)
• Lessee Books
– As Expense in P&l
– On a straight line method
– To disclose total of future
minimum lease payments

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Operating Lease (AS19) :
Lessor
• Asset given on lease to be shown under Fixed assets
• Lease income to be recognized in the P&l on a straight line
basis over the lease term
• Depreciation on a basis consistent with his practice (AS-6)
• Should disclose in balance sheet – gross carrying amt.
• Accumulated depreciation
• Accumulated impairment losses
• Future minimum lease payments under non-cancelable
OLs…

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Finance Lease (IAS)
• Lessee to recognize assets & liabilities in the
balance sheet.
– At the inception of lease
– At amounts equal to their fair value
– Fair value or PV of the minimum lease
payments
• Each payment to be allocated between a
reduction of obligation & finance charge
• Asset is depreciated in a way consistent with
lessee’s practice
• Contingent rentals are generally not included in
the minimum lease payments

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Finance Lease ( Direct
Financing): US GAP
• Lessee
– Leased equipment( PV of LP/FV)
• Lease Payments
– Depreciation Expense
• Accumulated Depreciation
• Lessor
– Lease Receivable( Gross sum of LP)
• Unearned Int
• Inventory of equipment

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Finance Lease ( Sales-Type )
USGAP
• Lessor Recognizes Profit at the inception of
Lease
– Lease Receivable
– Cost of Goods sold( Lessor’s cost of
goods)
• Sales revenue( Present value of the
minimum lease payments)
• Unearned interest revenue
• Inventory of equipment( Lessor’s cost)

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Finance Lease (AS19): Lessee
• Lessee should treat Lease as an asset & liability at
the fair value of leased asset or PV of the minimum
lease payments
• PV of minimum lease payments is calculated by
discounting with interest rate implicit in the lease.
• If not practicable, use lessee’s incremental
borrowing rate.
• Payments should be apportioned between finance
charge and reduction of the outstanding liability.
• Depreciation charge as per AS6

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Finance Lease (AS19): Lessee
• Assets acquired under finance lease to be
shown separately
• Should disclose total the total of minimum
lease payments at the balance sheet date in
the following manner
– Not later than one year
– Later than one year and not later than five years
– Later than five years

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Finance Lease( AS19) : Lessor
• Assets given under finance lease as a
receivable at an amount equal to the net
investment in the lease
• Manufacturer lessor should recognize the
transaction of sale in P&l for the period.
• Should disclose total gross investment in
the lease & the PV of minimum lease
payments receivable at the balance sheet
date

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Sale & Buy back( USGAP)
• Gain- amortized over the lease
time
• Loss- immediately accounted for.

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Sale & Buy back (AS-19)
• Finance Lease
– Excess/ Deficiency of sale proceeds over the
carrying amount should be amortized over the
lease term in proportion to the depreciation of the
leased asset
• Operating Lease
– If transaction transaction is established at fair
value, the profit/Loss to be recognized
immediately
– If the sale price is below fair value- any
Profit/Loss to be recognized immediately
– If sale price is above fair value –excess over fair
value to be amortized over the expected life

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Treatment of Residual value
• Who gets the RV?
• If retained with Lessor, PV of RV
is deducted from FMV
• Lessee-guaranteed RV is included
in the minimum lease payments
• Un-guaranteed RV is not included

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Land
• Infinite
• No depreciation
• USGAP
– Fair Value= Carrying value= Direct
Finance lease
• IAS implies – single lease of land &
buildings be split into two.