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Ind AS 17, Lease | Indian Accounting Standard Summary

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Ind AS 17, Lease | Indian Accounting Standard Summary. In our previous articles of Accounting and Auditing, we discussed Ind AS 1 to Ind AS 12. In this article, we are going to provide the summary of Ind AS 17. You can download previous Indian Accounting Standards in pdf by click here.

Ind AS 17, Lease

The objective of this Indian Accounting Standard 17 is to prescribe, for lessees and lessors, the appropriate accounting policies and disclosure to apply in relation to leases.

The classification of leases adopted in this Standard is based on the extent to which risks and rewards incidental to ownership of a leased asset lie with the lessor or the lessee.

A lease is classified as a finance lease if it transfers substantially all the risks and rewards incidental to ownership. A lease is classified as an operating lease if it does not transfer substantially all the risks and rewards incidental to ownership.

Leases in the financial statements of lessees (Ind AS 17)

Operating Lease

Lease payments under an operating lease shall be recognized as an expense on a straight-line basis over the lease term unless either another systematic basis is more representative of the time pattern of the user’s benefit or the payments to the lessor are structured to increase in line with expected general inflation to compensate for the lessor’s expected inflationary cost increases.

Finance leases

At the commencement of the lease term, lessees shall recognize finance leases as assets and liabilities in their balance sheets at amounts equal to the fair value of the leased property or, if lower, the present value of the minimum lease payments, each determined at the inception of the lease. The discount rate to be used in calculating the present value of the minimum lease payments is the interest rate implicit in the lease, if this is practicable to determine; if not, the lessee’s incremental borrowing rate shall be used. Any initial direct costs of the lessee are added to the amount recognized as an asset.

Minimum lease payments shall be apportioned between the finance charge and the reduction of the outstanding liability. The finance charge shall be allocated to each period during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability. Contingent rents shall be charged as expenses in the periods in which they are incurred.

A finance lease gives rise to depreciation expense for depreciable assets as well as finance expense for each accounting period. The depreciation policy for depreciable leased assets shall be consistent with that for depreciable assets that are owned, and the depreciation recognized shall be calculated in accordance with Ind AS 16, Property, Plant and Equipment and Ind AS 38, Intangible Assets. If there is no reasonable certainty that the lessee will obtain ownership by the end of the lease term, the asset shall be fully depreciated over the shorter of the lease term and its useful life.

Leases in the financial statements of lessors (Ind AS 17)

Operating Leases

Lessors shall present assets subject to operating leases on their balance sheet according to the nature of the asset. The depreciation policy for depreciable leased assets shall be consistent with the lessor’s normal depreciation policy for similar assets, and depreciation shall be calculated in accordance with Ind AS 16 and Ind AS 38. Lease income from operating leases (excluding amounts for services such as insurance and maintenance) shall be recognized in income on a straight-line basis over the lease term unless either:

(a) another systematic basis is more representative of the time pattern in which use benefit derived from the leased asset is diminished, even if the payments to the lessors are not on that basis; or

(b) the payments to the lessor are structured to increase in line with expected general inflation to compensate for the lessor’s expected inflationary cost increases. If payments to the lessor vary according to factors other than inflation, then this condition is not met.

Finance leases (Ind AS 17)

Lessors shall recognize assets held under a finance lease in their balance sheets and present them as a receivable at an amount equal to the net investment in the lease. The recognition of finance income shall be based on a pattern
reflecting a constant periodic rate of return on the lessor’s net investment in the finance lease.
Manufacturer or dealer lessors shall recognize selling profit or loss in the period, in accordance with the policy followed by the entity for outright sales. If artificially low rates of interest are quoted, selling profit shall be restricted to that which would apply if a market rate of interest were charged. Costs incurred by manufacturer or dealer lessors in connection with negotiating and arranging a lease shall be recognized as an expense when the selling profit is recognized.

Sale and leaseback transactions (Ind AS 17)

A sale and leaseback transaction involves the sale of an asset and the leasing back of the same asset. The lease payment and the sale price are usually interdependent because they are negotiated as a package. The accounting treatment of a sale and leaseback transaction depends upon the type of lease involved.
Appendix C of Ind AS 17 provides guidance
(a) for determining whether the arrangement is, or contain, leases that should be accounted for in accordance with Ind AS 17;
(b) when the assessment or a reassessment of whether an arrangement is, or contains, a lease should be made, and
(c) if an arrangement is, or contains a lease, how the payments for the lease should be separated from payments for any other elements in the arrangement.
Appendix A of Ind AS 17 provides guidance on the recognition of incentives in an operating lease in the financial statements of lessor and lessee. The Appendix prescribes that the lessor shall recognize the aggregate cost of incentives as a reduction of rental income over the lease term, on a straight-line basis unless another systematic basis is representative of the time pattern over which the benefit of the leased asset is diminished. The lessee shall recognize the aggregate benefit of incentives as a reduction of rental expense over the lease term, on a straight-line basis unless another systematic basis is representative of the time pattern of the lessee’s benefit from the use of the leased asset.
Click here to download the India Accounting Standard | Ind AS 17,  in pdf.

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