As19

This query is : Resolved

Querist : Anonymous

Querist : Anonymous (Querist)

28 June 2014 Please Suggest:-

A company (Level-3 entity)has entered into a lease agreement for 10 years for Office premises for a sum of Rs. 100,000/- p.a. subject to increase of rental @10%p.a. from 3rd year.

What are the disclosure requirements in Notes to Accounts would be applicable as well as what is the treatment to be done in books of accounts wrt SLM calculations ??

Thanks

Querist : Anonymous

Querist : Anonymous (Querist)

28 June 2014 Please suggest your expertise.............

Asha Kanta Sharma

Asha Kanta Sharma (Expert)
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14 July 2024 ### Disclosure Requirements under AS 19 - Leases

When a company enters into a lease agreement, such as the one described (10 years with increasing rent), AS 19 requires specific disclosures in the Notes to Accounts to ensure transparency and clarity in financial reporting. Here’s what needs to be disclosed:

1. **Nature of Lease Arrangements:**
- Describe the nature of the lease, including the duration (in this case, 10 years), any renewal or termination options, and the terms and conditions under which these options can be exercised.

2. **Future Lease Payments:**
- Disclose the future minimum lease payments under non-cancellable leases as of the balance sheet date, showing the aggregate of minimum sublease rentals to be received in the future under non-cancellable subleases, together with the present value of the minimum lease payments.

3. **Contingent Rentals:**
- If there are any contingent rentals based on factors such as sales or usage of the leased asset, disclose the basis used to determine the contingent rental payments.

4. **Sublease Rentals:**
- If the entity is a lessor and has leased out the same or similar asset under an operating lease, disclose the future minimum lease payments expected to be received under non-cancellable subleases as of the balance sheet date.

5. **Rental Escalations:**
- Disclose any rental escalation clauses, like the 10% annual increase from the 3rd year in your case, and how these are accounted for in the financial statements.

6. **Options to Purchase:**
- If the lease agreement includes options for the lessee to purchase the leased asset, disclose details of such options and any significant terms and conditions associated with them.

7. **Other Lease Terms:**
- Disclose any other significant leasing terms and conditions that could impact the financial position and performance of the entity.

### Treatment in Books of Accounts

Since the lease is for office premises and the rental payment increases by 10% annually from the 3rd year onwards, the accounting treatment would typically involve:

- **Straight-Line Method (SLM) Calculation:**
- Allocate the total lease payments evenly over the lease term, including any periods covered by an option to renew if the lessee is reasonably certain to exercise that option.

- **Recognition of Lease Payments:**
- Recognize lease payments as an expense in the Statement of Profit and Loss on a straight-line basis unless another systematic and rational basis is more representative of the time pattern in which use benefit derived from the leased asset is diminished.

- **Initial Recognition:**
- Recognize a leased asset and a lease liability at an amount equal to the present value of the minimum lease payments.

- **Subsequent Measurement:**
- Measure the lease liability at amortized cost using the effective interest method.
- Depreciate the leased asset in accordance with the accounting policy applicable to owned assets.

- **Annual Adjustments for Rental Increases:**
- Adjust the lease expense annually to reflect the increase in rental payments according to the terms of the lease agreement.

### Conclusion

Proper disclosure in the Notes to Accounts and accurate treatment in the books of accounts in accordance with AS 19 ensure compliance with accounting standards and provide stakeholders with relevant information about the company's leasing activities, their financial implications, and commitments. This transparency aids in making informed decisions regarding the company's financial position and performance.

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