Accounting Standard (AS) 19

Leases

Contents
OBJECTIVE

SCOPE Paragraphs 1-2

DEFINITIONS 3-4

CLASSIFICATION OF LEASES 5-10

LEASES IN THE FINANCIAL

STATEMENTS OF LESSEES 11-25

Finance Leases 11-22

Operating Leases 23-25

LEASES IN THE FINANCIAL

STATEMENTS OF LESSORS 26-46

Finance Leases 26-38

Operating Leases 39-46

SALE AND LEASEBACK TRANSACTIONS 47-55

ILLUSTRATION

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 Accounting Standard (AS) 19#

Leases

(This Accounting Standard includes paragraphs set in bold italic type and plain type,
which have equal authority. Paragraphs in bold italic type indicate the main principles.
This Accounting Standard should be read in the context of its objective and the General
Instructions contained in part A of the Annexure to the Notification.)

Objective

The objective of this Standard is to prescribe, for lessees and lessors, the appropriate
accounting policies and disclosures in relation to finance leases and operating leases.

Scope

1. This Standard should be applied in accounting for all leases other than:

(a) lease agreements to explore for or use natural resources, such as oil, gas,
timber, metals and other mineral rights; and

(b) licensing agreements for items such as motion picture films, video recordings,
plays, manuscripts, patents and copyrights; and

(c) lease agreements to use lands.

2. This Standard applies to agreements that transfer the right to use assets even though
substantial services by the lessor may be called for in connection with the operation or
maintenance of such assets. On the other hand, this Standard does not apply to agreements
that are contracts for services that do not transfer the right to use assets from one
contracting party to the other.

Definitions

3. The following terms are used in this Standard with the meanings specified:

3.1 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.

3.2 A finance lease is a lease that transfers substantially all the risks and rewards
incident to ownership of an asset.

#
This AS was notified vide Notification G.S.R. 739(E) dated 7th December, 2006.

In respect of assets leased prior to the effective date of the notification prescribing this Standard under Section
211 of the Companies Act, 1956, the applicability of this Standard would be determined on the basis of the
Accounting Standard (AS) 19, issued by the ICAI in 2001.

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3.3 An operating lease is a lease other than a finance lease.

3.4 A non-cancellable lease is a lease that is cancellable only:

(a) upon the occurrence of some remote contingency; or

(b) with the permission of the lessor; or

(c) if the lessee enters into a new lease for the same or an equivalent asset with
the same lessor; or

(d) upon payment by the lessee of an additional amount such that, at inception,
continuation of the lease is reasonably certain.

3.5 The inception of the lease is the earlier of the date of the lease agreement and the
date of a commitment by the parties to the principal provisions of the lease.

3.6 The lease term is the non-cancellable period for which the lessee has agreed to take
on lease the asset together with any further periods for which the lessee has the option
to continue the lease of the asset, with or without further payment, which option at the
inception of the lease it is reasonably certain that the lessee will exercise.

3.7 Minimum lease payments are the payments over the lease term that the lessee is, or
can be required, to make excluding contingent rent, costs for services and taxes to be
paid by and reimbursed to the lessor, together with:

(a) in the case of the lessee, any residual value guaranteed by or on behalf of the
lessee; or
(b) in the case of the lessor, any residual value guaranteed to the lessor:

(i) by or on behalf of the lessee; or

(ii) by an independent third party financially capable of meeting this guarantee.

However, if the lessee has an option to purchase the asset at a price which is expected to
be sufficiently lower than the fair value at the date the option becomes exercisable that,
at the inception of the lease, is reasonably certain to be exercised, the minimum lease
payments comprise minimum payments payable over the lease term and the payment
required to exercise this purchase option.

3.8 Fair value is the amount for which an asset could be exchanged or a liability
settled between knowledgeable, willing parties in an arm’s length transaction.

3.9 Economic life is either:

(a) the period over which an asset is expected to be economically usable by one or
more users; or

(b) the number of production or similar units expected to be obtained from the
asset by one or more users.
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3.10 Useful life of a leased asset is either:

(a) the period over which the leased asset is expected to be used by the lessee; or

(b) the number of production or similar units expected to be obtained from the use
of the asset by the lessee.

3.11 Residual value of a leased asset is the estimated fair value of the asset at the end of
the lease term.

3.12 Guaranteed residual value is:

(a) in the case of the lessee, that part of the residual value which is guaranteed by
the lessee or by a party on behalf of the lessee (the amount of the guarantee
being the maximum amount that could, in any event, become payable); and

(b) in the case of the lessor, that part of the residual value which is guaranteed by
or on behalf of the lessee, or by an independent third party who is financially
capable of discharging the obligations under the guarantee.

3.13 Unguaranteed residual value of a leased asset is the amount by which the residual
value of the asset exceeds its guaranteed residual value.

3.14 Gross investment in the lease is the aggregate of the minimum lease payments
under a finance lease from the standpoint of the lessor and any unguaranteed residual
value accruing to the lessor.

3.15 Unearned finance income is the difference between:

(a) the gross investment in the lease; and

(b) the present value of

(i)the minimum lease payments under a finance lease from the standpoint of
the lessor; and

(ii)any unguaranteed residual value accruing to the lessor, at the interest rate
implicit in the lease.

3.16 Net investment in the lease is the gross investment in the lease less unearned
finance income.

3.17 The interest rate implicit in the lease is the discount rate that, at the inception of
the lease, causes the aggregate present value of

(a) the minimum lease payments under a finance lease from the standpoint of the
lessor; and

(b) any unguaranteed residual value accruing to the lessor, to be equal to the fair
value of the leased asset.
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3.18 The lessee’s incremental borrowing rate of interest is the rate of interest the lessee
would have to pay on a similar lease or, if that is not determinable, the rate that, at
the inception of the lease, the lessee would incur to borrow over a similar term, and
with a similar security, the funds necessary to purchase the asset.

3.19 Contingent rent is that portion of the lease payments that is not fixed in amount
but is based on a factor other than just the passage of time (e.g., percentage of
sales, amount of usage, price indices, market rates of interest).

4. The definition of a lease includes agreements for the hire of an asset which contain a
provision giving the hirer an option to acquire title to the asset upon the fulfillment of
agreed conditions. These agreements are commonly known as hire purchase agreements.
Hire purchase agreements include agreements under which the property in the asset is to
pass to the hirer on the payment of the last instalment and the hirer has a right to terminate
the agreement at any time before the property so passes.

Classification of Leases

5. The classification of leases adopted in this Standard is based on the extent to which
risks and rewards incident to ownership of a leased asset lie with the lessor or the lessee.
Risks include the possibilities of losses from idle capacity or technological obsolescence
and of variations in return due to changing economic conditions. Rewards may be
represented by the expectation of profitable operation over the economic life of the asset
and of gain from appreciation in value or realisation of residual value.

6. A lease is classified as a finance lease if it transfers substantially all the risks and
rewards incident to ownership. Title may or may not eventually be transferred. A lease is
classified as an operating lease if it does not transfer substantially all the risks and rewards
incident to ownership.

7. Since the transaction between a lessor and a lessee is based on a lease agreement
common to both parties, it is appropriate to use consistent definitions. The application of
these definitions to the differing circumstances of the two parties may sometimes result in
the same lease being classified differently by the lessor and the lessee.

8. Whether a lease is a finance lease or an operating lease depends on the substance of

the transaction rather than its form. Examples of situations which would normally lead to a
lease being classified as a finance lease are:

(a) the lease transfers ownership of the asset to the lessee by the end of the lease
term;

(b) the lessee has the option to purchase the asset at a price which is expected to be
sufficiently lower than the fair value at the date the option becomes exercisable
such that, at the inception of the lease, it is reasonably certain that the option will
be exercised;

(c) the lease term is for the major part of the economic life of the asset even if title

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 is not transferred;

(d) at the inception of the lease the present value of the minimum lease payments
amounts to at least substantially all of the fair value of the leased asset; and

(e) the leased asset is of a specialised nature such that only the lessee can use it
without major modifications being made.

9. Indicators of situations which individually or in combination could also lead to a

lease being classified as a finance lease are:

(a) if the lessee can cancel the lease, the lessor’s losses associated with the
cancellation are borne by the lessee;

(b) gains or losses from the fluctuation in the fair value of the residual fall to the
lessee (for example in the form of a rent rebate equalling most of the sales
proceeds at the end of the lease); and

(c) the lessee can continue the lease for a secondary period at a rent which is
substantially lower than market rent.

10. Lease classification is made at the inception of the lease. If at any time the lessee and
the lessor agree to change the provisions of the lease, other than by renewing the lease, in
a manner that would have resulted in a different classification of the lease under the
criteria in paragraphs 5 to 9 had the changed terms been in effect at the inception of the
lease, the revised agreement is considered as a new agreement over its revised term.
Changes in estimates (for example, changes in estimates of the economic life or of the
residual value of the leased asset) or changes in circumstances (for example, default by the
lessee), however, do not give rise to a new classification of a lease for accounting
purposes.

Leases in the Financial Statements of Lessees

Finance Leases

11. At the inception of a finance lease, the lessee should recognise the lease as an asset
and a liability. Such recognition should be at an amount equal to the fair value of the
leased asset at the inception of the lease. However, if the fair value of the leased asset
exceeds the present value of the minimum lease payments from the standpoint of the
lessee, the amount recorded as an asset and a liability should be the present value of the
minimum lease payments from the standpoint of the lessee. In calculating the present
value of the minimum lease payments the discount rate is the interest rate implicit in the
lease, if this is practicable to determine; if not, the lessee’s incremental borrowing rate
should be used.

Example

(a) An enterprise (the lessee) acquires a machinery on lease from a leasing company
(the lessor) on January 1, 20X0. The lease term covers the entire economic life of
the machinery, i.e., 3 years. The fair value of the machinery on January 1, 20X0 is
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 Rs.2,35,500. The lease agreement requires the lessee to pay an amount of
Rs.1,00,000 per year beginning December 31, 20X0. The lessee has guaranteed a
residual value of Rs.17,000 on December 31, 20X2 to the lessor. The lessor,
however, estimates that the machinery would have a salvage value of only Rs.3,500
on December 31, 20X2.

The interest rate implicit in the lease is 16 per cent (approx.). This is calculated
using the following formula:

ALR ALR ALR RV

Fair value = + + …+ +
1 2 n n
(1 +r) (1 +r) (1 +r) (1 +r)

where ALR is annual lease rental,

RV is residual value (both guaranteed and unguaranteed),

n is the lease term,

r is interest rate implicit in the lease.

The present value of minimum lease payments from the stand point of the
lessee is Rs.2,35,500.

The lessee would record the machinery as an asset at Rs.2,35,500 with a

corresponding liability representing the present value of lease payments over
the lease term (including the guaranteed residual value).

(b) In the above example, suppose the lessor estimates that the machinery would have a
salvage value of Rs.17,000 on December 31, 20X2. The lessee, however,
guarantees a residual value of Rs.5,000 only.

The interest rate implicit in the lease in this case would remain unchanged at 16%
(approx.). The present value of the minimum lease payments from the standpoint of
the lessee, using this interest rate implicit in the lease, would be Rs.2,27,805. As
this amount is lower than the fair value of the leased asset (Rs. 2,35,500), the lessee
would recognise the asset and the liability arising from the lease at Rs.2,27,805.

In case the interest rate implicit in the lease is not known to the lessee, the present
value of the minimum lease payments from the standpoint of the lessee would be
computed using the lessee’s incremental borrowing rate.

12. Transactions and other events are accounted for and presented in accordance with their
substance and financial reality and not merely with their legal form. While the legal form of a
lease agreement is that the lessee may acquire no legal title to the leased asset, in the case of
finance leases the substance and financial reality are that the lessee acquires the economic
benefits of the use of the leased asset for the major part of its economic life in return for
entering into an obligation to pay for that right an amount approximating to the fair value
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of the asset and the related finance charge.

13. If such lease transactions are not reflected in the lessee’s balance sheet, the economic
resources and the level of obligations of an enterprise are understated thereby distorting
financial ratios. It is therefore appropriate that a finance lease be recognised in the lessee’s
balance sheet both as an asset and as an obligation to pay future lease payments. At the
inception of the lease, the asset and the liability for the future lease payments are
recognised in the balance sheet at the same amounts.

14. It is not appropriate to present the liability for a leased asset as a deduction from the
leased asset in the financial statements. The liability for a leased asset should be presented
separately in the balance sheet as a current liability or a long-term liability as the case may be.

15. Initial direct costs are often incurred in connection with specific leasing activities, as
in negotiating and securing leasing arrangements. The costs identified as directly
attributable to activities performed by the lessee for a finance lease are included as part of
the amount recognised as an asset under the lease.

16. Lease payments should be apportioned between the finance charge and the
reduction of the outstanding liability. The finance charge should be allocated to periods
during the lease term so as to produce a constant periodic rate of interest on the
remaining balance of the liability for each period.

Example:

In the example (a) illustrating paragraph 11, the lease payments would be apportioned
by the lessee between the finance charge and the reduction of the outstanding liability
as follows:

Year Finance Payment Reduction in Outstanding

charge (Rs.) outstanding liability
(Rs.) liability (Rs.) (Rs.)
Year 1 (January 1) 2,35,500
(December 31) 37,680 1,00,000 62,320 1,73,180
Year 2 (December 31) 27,709 1,00,000 72,291 1,00,889
Year 3 (December 31) 16,142 1,00,000 83,858 17,031

17. In practice, in allocating the finance charge to periods during the lease term, some
form of approximation may be used to simplify the calculation.

18. A finance lease gives rise to a depreciation expense for the asset as well as a
finance expense for each accounting period. The depreciation policy for a leased asset
should be consistent with that for depreciable assets which are owned, and the
depreciation recognised should be calculated on the basis set out in Accounting
Standard (AS) 6, Depreciation Accounting. If there is no reasonable certainty that the
lessee will obtain ownership by the end of the lease term, the asset should be fully


The difference between this figure and guaranteed residual value (Rs.17,000) is due to approximation in
computing the interest rate implicit in the lease.
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depreciated over the lease term or its useful life, whichever is shorter.

19. The depreciable amount of a leased asset is allocated to each accounting period
during the period of expected use on a systematic basis consistent with the depreciation
policy the lessee adopts for depreciable assets that are owned. If there is reasonable
certainty that the lessee will obtain ownership by the end of the lease term, the period of
expected use is the useful life of the asset; otherwise the asset is depreciated over the lease
term or its useful life, whichever is shorter.

20. The sum of the depreciation expense for the asset and the finance expense for the
period is rarely the same as the lease payments payable for the period, and it is, therefore,
inappropriate simply to recognise the lease payments payable as an expense in the
statement of profit and loss. Accordingly, the asset and the related liability are unlikely to
be equal in amount after the inception of the lease.

21. To determine whether a leased asset has become impaired, an enterprise applies
the Accounting Standard dealing with impairment of assets 1, that sets out the requirements
as to how an enterprise should perform the review of the carrying amount of an asset, how
it should determine the recoverable amount of an asset and when it should recognise, or
reverse, an impairment loss.

22. The lessee should, in addition to the requirements of AS 10, Accounting for Fixed
Assets, AS 6, Deprecation Accounting, and the governing statute, make the following
disclosures for finance leases:

(a) assets acquired under finance lease as segregated from the assets owned;

(b) for each class of assets, the net carrying amount at the balance sheet date;

(c) a reconciliation between the total of minimum lease payments at the balance
sheet date and their present value. In addition, an enterprise should disclose
the total of minimum lease payments at the balance sheet date, and their
present value, for each of the following periods:

(i) not later than one year;

(ii) later than one year and not later than five years;

(iii) later than five years;

(d) contingent rents recognised as expense in the statement of profit and loss for
the period;

(e) the total of future minimum sublease payments expected to be received under
non-cancellable subleases at the balance sheet date; and

(f) a general description of the lessee’s significant leasing arrangements

1
Accounting Standard (AS) 28, ‘Impairment of Assets’, specifies the requirements relating to impairment of
assets.
9
 including, but not limited to, the following:

(i) the basis on which contingent rent payments are determined;

(ii) the existence and terms of renewal or purchase options and escalation
clauses; and
(iii) restrictions imposed by lease arrangements, such as those concerning
dividends, additional debt, and further leasing.

Provided that a Small and Medium Sized Company, as defined in the Notification, may
not comply with sub-paragraphs (c), (e) and (f).

Operating Leases

23. Lease payments under an operating lease should be recognised as an expense in

the statement of profit and loss on a straight line basis over the lease term unless
another systematic basis is more representative of the time pattern of the user’s benefit.

24. For operating leases, lease payments (excluding costs for services such as insurance
and maintenance) are recognised as an expense in the statement of profit and loss on a
straight line basis unless another systematic basis is more representative of the time
pattern of the user’s benefit, even if the payments are not on that basis.

25. The lessee should make the following disclosures for operating leases:

(a) the total of future minimum lease payments under noncancellable operating
leases for each of the following periods:

(i) not later than one year;

(ii) later than one year and not later than five years;

(iii) later than five years;

(b) the total of future minimum sublease payments expected to be received under
non-cancellable subleases at the balance sheet date;

(c) lease payments recognised in the statement of profit and loss for the period,
with separate amounts for minimum lease payments and contingent rents;

(d) sub-lease payments received (or receivable) recognised in the statement of

profit and loss for the period;

(e) a general description of the lessee’s significant leasing arrangements

including, but not limited to, the following:

(i) the basis on which contingent rent payments are determined;

(ii) the existence and terms of renewal or purchase options and escalation

10
 clauses; and

(iii) restrictions imposed by lease arrangements, such as those concerning

dividends, additional debt, and further leasing.

Provided that a Small and Medium Sized Company, as defined in the Notification, may
not comply with sub-paragraphs (a), (b) and (e).

Leases in the Financial Statements of Lessors

Finance Leases

26. The lessor should recognise assets given under a finance lease in its balance sheet
as a receivable at an amount equal to the net investment in the lease.

27. Under a finance lease substantially all the risks and rewards incident to legal ownership
are transferred by the lessor, and thus the lease payment receivable is treated by the lessor as
repayment of principal, i.e., net investment in the lease, and finance income to reimburse
and reward the lessor for its investment and services.

28. The recognition of finance income should be based on a pattern reflecting a

constant periodic rate of return on the net investment of the lessor outstanding in
respect of the finance lease.

29. A lessor aims to allocate finance income over the lease term on a systematic and
rational basis. This income allocation is based on a pattern reflecting a constant periodic
return on the net investment of the lessor outstanding in respect of the finance lease. Lease
payments relating to the accounting period, excluding costs for services, are reduced from
both the principal and the unearned finance income.

30. Estimated unguaranteed residual values used in computing the lessor’s gross
investment in a lease are reviewed regularly. If there has been a reduction in the estimated
unguaranteed residual value, the income allocation over the remaining lease term is
revised and any reduction in respect of amounts already accrued is recognised
immediately. An upward adjustment of the estimated residual value is not made.

31. Initial direct costs, such as commissions and legal fees, are often incurred by lessors
in negotiating and arranging a lease. For finance leases, these initial direct costs are
incurred to produce finance income and are either recognised immediately in the statement
of profit and loss or allocated against the finance income over the lease term.

32. The manufacturer or dealer lessor should recognise the transaction of sale in the
statement of profit and loss for the period, in accordance with the policy followed by the
enterprise for outright sales. If artificially low rates of interest are quoted, profit on sale
should be restricted to that which would apply if a commercial rate of interest were
charged. Initial direct costs should be recognised as an expense in the statement of
profit and loss at the inception of the lease.

33. Manufacturers or dealers may offer to customers the choice of either buying or
11
leasing an asset. A finance lease of an asset by a manufacturer or dealer lessor gives rise to
two types of income:

(a) the profit or loss equivalent to the profit or loss resulting from an outright sale of
the asset being leased, at normal selling prices, reflecting any applicable volume
or trade discounts; and

(b) the finance income over the lease term.

34. The sales revenue recorded at the commencement of a finance lease term by a
manufacturer or dealer lessor is the fair value of the asset. However, if the present value of
the minimum lease payments accruing to the lessor computed at a commercial rate of
interest is lower than the fair value, the amount recorded as sales revenue is the present
value so computed. The cost of sale recognised at the commencement of the lease term is
the cost, or carrying amount if different, of the leased asset less the present value of the
unguaranteed residual value. The difference between the sales revenue and the cost of sale
is the selling profit, which is recognised in accordance with the policy followed by the
enterprise for sales.

35. Manufacturer or dealer lessors sometimes quote artificially low rates of interest in
order to attract customers. The use of such a rate would result in an excessive portion of
the total income from the transaction being recognised at the time of sale. If artificially
low rates of interest are quoted, selling profit would be restricted to that which would
apply if a commercial rate of interest were charged.

36. Initial direct costs are recognised as an expense at the commencement of the lease term
because they are mainly related to earning the manufacturer’s or dealer’s selling profit.

37. The lessor should make the following disclosures for finance leases:

(a) a reconciliation between the total gross investment in the lease at the balance
sheet date, and the present value of minimum lease payments receivable at the
balance sheet date. In addition, an enterprise should disclose the total gross
investment in the lease and the present value of minimum lease payments
receivable at the balance sheet date, for each of the following periods:

(i) not later than one year;

(ii) later than one year and not later than five years;

(iii) later than five years;

(b) unearned finance income;

(c) the unguaranteed residual values accruing to the benefit of the lessor;

(d) the accumulated provision for uncollectible minimum lease payments receivable;

(e) contingent rents recognised in the statement of profit and loss for the period;

(f) a general description of the significant leasing arrangements of the lessor; and
12
 (g) accounting policy adopted in respect of initial direct costs.

Provided that a Small and Medium Sized Company, as defined in the Notification, may
not comply with sub-paragraphs (a) and (f).

38. As an indicator of growth it is often useful to also disclose the gross investment less
unearned income in new business added during the accounting period, after deducting the
relevant amounts for cancelled leases.

Operating Leases

39. The lessor should present an asset given under operating lease in its balance sheet
under fixed assets.

40. Lease income from operating leases should be recognised in the statement of profit
and loss on a straight line basis over the lease term, unless another systematic basis is
more representative of the time pattern in which benefit derived from the use of the
leased asset is diminished.

41. Costs, including depreciation, incurred in earning the lease income are recognised as
an expense. Lease income (excluding receipts for services provided such as insurance and
maintenance) is recognised in the statement of profit and loss on a straight line basis over
the lease term even if the receipts are not on such a basis, unless another systematic basis
is more representative of the time pattern in which benefit derived from the use of the
leased asset is diminished.

42. Initial direct costs incurred specifically to earn revenues from an operating lease are
either deferred and allocated to income over the lease term in proportion to the recognition
of rent income, or are recognised as an expense in the statement of profit and loss in the
period in which they are incurred.

43. The depreciation of leased assets should be on a basis consistent with the normal
depreciation policy of the lessor for similar assets, and the depreciation charge should
be calculated on the basis set out in AS 6, Depreciation Accounting.

44. To determine whether a leased asset has become impaired, an enterprise applies the

Accounting Standard dealing with impairment of assets 2 that sets out the requirements for
how an enterprise should perform the review of the carrying amount of an asset, how it
should determine the recoverable amount of an asset and when it should recognise, or
reverse, an impairment loss.

45. A manufacturer or dealer lessor does not recognise any selling profit on entering into
an operating lease because it is not the equivalent of a sale.

2
Accounting Standard (AS) 28, ‘Impairment of Assets’, specifies the requirements relating to impairment of
assets.

13
46. The lessor should, in addition to the requirements of AS 6, Depreciation
Accounting and AS 10, Accounting for Fixed Assets, and the governing statute, make
the following disclosures for operating leases:

(a) for each class of assets, the gross carrying amount, the accumulated depreciation
and accumulated impairment losses at the balance sheet date; and

(i) the depreciation recognised in the statement of profit and loss for the
period;

(ii) impairment losses recognised in the statement of profit and loss for the
period;

(iii) impairment losses reversed in the statement of profit and loss for the period;

(b) the future minimum lease payments under non-cancellable operating leases in
the aggregate and for each of the following periods:

(i) not later than one year;

(ii) later than one year and not later than five years;

(iii) later than five years;

(c) total contingent rents recognised as income in the statement of profit and loss
for the period;

(d) a general description of the lessor’s significant leasing arrangements; and

(e) accounting policy adopted in respect of initial direct costs.

Provided that a Small and Medium Sized Company, as defined in the Notification, may
not comply with sub-paragraphs (b) and (d).

Sale and Leaseback Transactions

47. A sale and leaseback transaction involves the sale of an asset by the vendor and the
leasing of the same asset back to the vendor. The lease payments and the sale price are
usually interdependent as they are negotiated as a package. The accounting treatment of a
sale and leaseback transaction depends upon the type of lease involved.

48. If a sale and leaseback transaction results in a finance lease, any excess or deficiency
of sales proceeds over the carrying amount should not be immediately recognised as income
or loss in the financial statements of a seller-lessee. Instead, it should be deferred and
amortised over the lease term in proportion to the depreciation of the leased asset.

49. If the leaseback is a finance lease, it is not appropriate to regard an excess of sales
proceeds over the carrying amount as income. Such excess is deferred and amortised over
the lease term in proportion to the depreciation of the leased asset. Similarly, it is not
14
appropriate to regard a deficiency as loss. Such deficiency is deferred and amortised over
the lease term.

50. If a sale and leaseback transaction results in an operating lease, and it is clear that
the transaction is established at fair value, any profit or loss should be recognised
immediately. If the sale price is below fair value, any profit or loss should be recognised
immediately except that, if the loss is compensated by future lease payments at below
market price, it should be deferred and amortised in proportion to the lease payments
over the period for which the asset is expected to be used. If the sale price is above fair
value, the excess over fair value should be deferred and amortised over the period for
which the asset is expected to be used.

51. If the leaseback is an operating lease, and the lease payments and the sale price are
established at fair value, there has in effect been a normal sale transaction and any profit
or loss is recognised immediately.

52. For operating leases, if the fair value at the time of a sale and leaseback transaction is
less than the carrying amount of the asset, a loss equal to the amount of the difference
between the carrying amount and fair value should be recognised immediately.

53. For finance leases, no such adjustment is necessary unless there has been an
impairment in value, in which case the carrying amount is reduced to recoverable amount
in accordance with the Accounting Standard dealing with impairment of assets.

54. Disclosure requirements for lessees and lessors apply equally to sale and leaseback
transactions. The required description of the significant leasing arrangements leads to
disclosure of unique or unusual provisions of the agreement or terms of the sale and
leaseback transactions.

55. Sale and leaseback transactions may meet the separate disclosure criteria set out in
paragraph 12 of Accounting Standard (AS) 5, Net Profit or Loss for the Period, Prior
Period Items and Changes in Accounting Policies.
Illustration

Sale and Leaseback Transactions that Result in Operating Leases

The illustration does not form part of the accounting standard. Its purpose is to illustrate
the application of the accounting standard.

A sale and leaseback transaction that results in an operating lease may give rise to profit or
a loss, the determination and treatment of which depends on the leased asset’s carrying
amount, fair value and selling price. The following table shows the requirements of the
accounting standard in various circumstances.

Sale price Carrying Carrying Carrying

established at amount amount less amount
fair value equal to than fair value above fair
(paragraph 50) fair value value
Profit No profit Recognise profit Not applicable
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 immediately
Loss No loss Not applicable Recognise loss
immediately
Sale price below
fair value
(paragraph 50)
Profit No profit Recognise profit No profit
immediately (note 1)
Loss not Recognise Recognise loss (note 1)
compensated by loss immediately
future lease immediately
payments at below
market price
Loss compensated Defer and Defer and (note 1)
by future lease amortise loss amortise loss
payments at below
market price
Sale price above
fair value
(paragraph 50)
Profit Defer and Defer and Defer and
amortise profit amortise profit amortise profit
(note 2)
Loss No loss No loss (note 1)

Note 1. These parts of the table represent circumstances that would have been dealt with
under paragraph 52 of the Standard. Paragraph 52 requires the carrying amount of an
asset to be written down to fair value where it is subject to a sale and leaseback.

Note 2. The profit would be the difference between fair value and sale price as the carrying
amount would have been written down to fair value in accordance with paragraph 52.

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