AS-19

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Querist : Anonymous

Querist : Anonymous (Querist)

15 January 2011 Hi Experts,
X ltd bought an asset on lease basis for a subtanial period of 10 years with an agreement with Y ltd.In the aggreement it is mentioned that X ltd can has got right to give bask the side at the end of any year.

1.My query is,How to treat the lease either as operating or financial?

Manmohan ACA, CS

Manmohan ACA, CS (Expert)
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15 January 2011 AS per AS-19 ,

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 is not transferred;

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.

further para 9 specifies 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

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Manmohan ACA, CS

Manmohan ACA, CS (Expert)
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15 January 2011 I Know you will think why the hell I'm pasting these para here , but the AS- 19 its self whether a lease is operating is financing is subjective concept and depends on the transactions so many things to be taken in consideration !! But as far as i think the assets has a life more then 10 (say 15 or 20 years) and you have right to five back the assets at ANY END YEAR !! SO i consider it as finance lease , but other condition must be taken in to consideration as per indicators mentioned above in Para 8 and 9 of AS- 19

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