Critical Analysis of Accounting Standard 19
AS-19 “LEASES”
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 OBJECTIVE
EXCLUSIONS
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
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 OBJECTIVE
EXCLUSIONS
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