AS 19 Lease Accounting (part 2)

Operating lease under lessor’s book:

The main characteristic of this part of lease are: they are given for short period and unlike finance lease, the lessor records the given asset in operating lease as asset in its book. The following states some more features:

ü  Lessor should record the asset given under operating lease as fixed asset in its balance sheet.

ü  Lease income from the operating lease should be recognized on straight line basis over the lease term unless another systematic method is more representative.

ü  Cost including depreciation is recognized as an expense.

ü  Initial direct cost are either deferred and allocated to the lease term or recorded in the p/l in the year the expense incurred and initial direct cost incurred, before the asset is ready to be put to use, is to be included in the cost of the asset.

If the production from that asset is variable that is, low initially and higher later onwards, the income and depreciation will be recorded according to the production from that assets. Lease rent adjustment account will be opened in the book as CA/CL according to the nature of transaction. To illustrate the above line take an example:

This example applies for lessee and lessors both.

A machine has been given on operating lease for 3 years under a fixed installment of Rs70000 per year. The given asset produces goods in 50000 unit in 1^st year, 90000 unit in second year and 120000 unit in third year.

Now this AS says that’s to maintain matching principle between revenue and costs one should divide total installment amount I,e 70000*3=210000 into production ratio that is, 5:9:12. So the required amount would be Rs 40385 in first year, Rs 72692 in second year, and Rs 96923 in third year but the contract is to give or received Rs70000 per year. Thus, if we talk about lessee, he will record two entries in first year:

1)      Lease rent a/c               Dr70000

           To Bank a/c

2)      P/L a/c                                    Dr 40385

Lease rent adjustment a/c   Dr 29615

       To Lease rent a/c                                  70000.

Because he has given payment in advance, this rent adjustment account will come under the head “current Asset” in the balance sheet of lessee.

 

The entry in the lessor’s book will be vice versa.

 

Disclosure:

The lessor should disclose the following in addition to the requirement under AS 6 and AS 10:

1)      For each class of asset, gross carrying amount, accumulated depreciation up to the balance sheet date and accumulated impairment losses of the asset, if any.

2)      Depreciation and impairment of losses recognize in the statement of profit and loss Account also the impairment losses reverse in the statement of P/L.

3)      Future minimum lease payments under non cancellable operating lease for following periods:

Not later than one year; later than one year but not later than 5 year; for later than five year.

4)      Total Contingent rent recognize as income in the statement of profit and loss account.

5)      Accounting policy adopted for initial direct cost.

Operating lease under lessee’s book:

Expenses should be recognized in the p/l on straight line basis unless another systematic method is more representative, that is If the production is variable the payment of rents will be recorded in the ratio of production.

Lease rent adjustment account will be opened for excess or deficit of the amount from the production ratio and accordingly it will be charged to asset or liability.  (See above example)

Disclosure:

Lessee is required to disclose the following main points:

1)      Future minimum lease payments under non cancellable operating lease for following periods:

        Not later than one year; later than one year but not later than 5 year; for later than five  years.

2)      Total of future minimum sublease payment expected to be received under non-cancellable sublease at balance sheet date.

3)      Sublease and lease payments recognized in the statement of profit and loss a/c. 

 

This was how I explained operating lease. If you have any query regarding this topic please feel free to write below in comment box. We will be happy to serve you.