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Ind AS - 017 - B. Indian Accounting Standards (Ind AS) - Companies Law - Ind AS - 017 - Indian Accounting Standard (Ind AS) 17 (This Indian Accounting Standard includes paragraphs set in bold type and plain type, which have equal authority. Paragraphs in bold type indicate the main principles.) Objective 1 The objective of this Standard is to prescribe, for lessees and lessors, the appropriate accounting policies and disclosure to apply in relation to . Scope 2 This Standard shall be applied in .....

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ng (see Ind AS 40, Investment Property); (c) biological assets within the scope of Ind AS 41 Agriculture held by lessees under finance ; or (d) biological assets within the scope of Ind AS 41 provided by lessors under operating . 3 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. This Standard does not apply to agreements that are contracts for .....

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ly be transferred. An operating lease is a lease other than a finance lease. A non-cancellable lease is a lease that is cancellable only: (a) upon the occurrence of some remote contingency; (b) with the permission of the lessor; (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 such an additional amount that, at inception of the lease, continuation of the lease is reasonably certain. The inception of the lease .....

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cognition of the lease (ie the recognition of the assets, liabilities, income or expenses resulting from the lease, as appropriate). The lease term is the non-cancellable period for which the lessee has contracted to lease the asset together with any further terms for which the lessee has the option to continue to lease the asset, with or without further payment, when at the inception of the lease it is reasonably certain that the lessee will exercise the option. Minimum lease payments are the p .....

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

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er which the economic benefits embodied in the asset are expected to be consumed by the entity. Guaranteed residual value is: (a) for a lessee, that part of the residual value that is guaranteed by the lessee or by a party related to the lessee (the amount of the guarantee being the maximum amount that could, in any event, become payable); and (b) for a lessor, that part of the residual value that is guaranteed by the lessee or by a third party unrelated to the lessor that is financially capable .....

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se payments receivable by the lessor under a finance lease, and (b) any unguaranteed residual value accruing to the lessor. Net investment in the lease is the gross investment in the lease discounted at the interest rate implicit in the lease. s is the difference between: (a) the gross investment in the lease, and (b) the net investment in the lease. 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 min .....

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t. Contingent rent is that portion of the lease payments that is not fixed in amount but is based on the future amount of a factor that changes other than with the passage of time (eg percentage of future sales, amount of future use, future price indices, future market rates of interest). 5 A lease agreement or commitment may include a provision to adjust the lease payments for changes in the construction or acquisition cost of the leased property or for changes in some other measure of cost or .....

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d conditions. These contracts are sometimes known as hire purchase contracts. 6A Ind AS 17 uses the term fair value in a way that differs in some respects from the definition of fair value in Ind AS 113, Fair Value Measurement. Therefore, when applying Ind AS 17 an entity measures fair value in accordance with Ind AS 17, not Ind AS 113. Classification of 7 The classification of adopted in this Standard is based on the extent to which risks and rewards incidental to ownership of a leased asset li .....

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is classified as an operating lease if it does not transfer substantially all the risks and rewards incidental to ownership. 9 Because the transaction between a lessor and a lessee is based on a lease agreement between them, it is appropriate to use consistent definitions. The application of these definitions to the differing circumstances of the lessor and lessee may result in the same lease being classified differently by them. For example, this may be the case if the lessor benefits from a r .....

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t is expected to be sufficiently lower than the fair value at the date the option becomes exercisable for it to be reasonably certain, at the inception of the lease, 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; (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 assets are o .....

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e sales proceeds at the end of the lease); and (c) the lessee has the ability to continue the lease for a secondary period at a rent that is substantially lower than market rent. 12 The examples and indicators in paragraphs 10 and 11 are not always conclusive. If it is clear from other features that the lease does not transfer substantially all risks and rewards incidental to ownership, the lease is classified as an operating lease. For example, this may be the case if ownership of the asset tra .....

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s 7-12 if the changed terms had been in effect at the inception of the lease, the revised agreement is regarded as a new agreement over its term. However, changes in estimates (for example, changes in estimates of the economic life or of the residual value of the leased property), or changes in circumstances (for example, default by the lessee), do not give rise to a new classification of a lease for accounting purposes. 14-15 [Refer Appendix 1] 15A When a lease includes both land and buildings .....

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e buildings elements in proportion to the relative fair values of the leasehold interests in the land element and buildings element of the lease at the inception of the lease. If the lease payments cannot be allocated reliably between these two elements, the entire lease is classified as a finance lease, unless it is clear that both elements are operating , in which case the entire lease is classified as an operating lease. 17 For a lease of land and buildings in which the amount that would init .....

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e lease term, lessees shall recognise finance 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. .....

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e major part of its economic life in return for entering into an obligation to pay for that right an amount approximating, at the inception of the lease, the fair value of the asset and the related finance charge. 22 If such lease transactions are not reflected in the lessee s balance sheet, the economic resources and the level of obligations of an entity are understated, thereby distorting financial ratios. Therefore, it is appropriate for a finance lease to be recognised in the lessee s balanc .....

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n of liabilities in the balance sheet a distinction is made between current and noncurrent liabilities, the same distinction is made for lease liabilities. 24 Initial direct costs are often incurred in connection with specific leasing activities, such as negotiating and securing leasing arrangements. The costs identified as directly attributable to activities performed by the lessee for a finance lease are added to the amount recognised as an asset. Subsequent measurement 25 Minimum lease paymen .....

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he calculation. 27 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 recognised 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 en .....

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the asset; otherwise the asset is depreciated over the shorter of the lease term and its useful life. 29 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. Accordingly, the asset and the related liability are unlikely to be equal in amount after the commencement of the lease term. 30 To determine w .....

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tity shall disclose the total of future minimum lease payments at the end of the reporting period, 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. (c) contingent rents recognised as an expense in the period. (d) the total of future minimum sublease payments expected to be received under non-cancellable sub at the end of the reporting period. (e) a general description of t .....

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es for assets leased under finance . Operating 33 Lease payments under an operating lease shall be recognised as an expense on a straight-line basis over the lease term unless either: (a) another systematic basis is more representative of the time pattern of the user s benefit 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 incr .....

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the following disclosures for operating : (a) the total of future minimum lease payments under non-cancellable operating 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 sub at the end of the reporting period. (c) lease and sublease payments recognised as an expense in the period, with separate amounts .....

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s Finance Initial recognition 36 Lessors shall recognise 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. 37 Under a finance lease substantially all the risks and rewards incidental to legal ownership are transferred by the lessor, and thus the lease payment receivable is treated by the lessor as repayment of principal and finance income to reimburse and reward the lessor for its investment and servi .....

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gnised over the lease term. The interest rate implicit in the lease is defined in such a way that the initial direct costs are included automatically in the finance lease receivable; there is no need to add them separately. Costs incurred by manufacturer or dealer lessors in connection with negotiating and arranging a lease are excluded from the definition of initial direct costs. As a result, they are excluded from the net investment in the lease and are recognised as an expense when the sellin .....

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t in the finance lease. Lease payments relating to the period, excluding costs for services, are applied against the gross investment in the lease to reduce both the principal and the unearned finance income. 41 Estimated unguaranteed residual values used in computing the lessor s gross investment in the lease are reviewed regularly. If there has been a reduction in the estimated unguaranteed residual value, the income allocation over the lease term is revised and any reduction in respect of amo .....

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ially 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 recognised as an expense when the selling profit is recognised. 43 Manufacturers or dealers often offer to customers the choice of either buying or leasing an asset. A finance lease of an asset by a manufacturer or dealer lessor gives rise to tw .....

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e of interest. The cost of sale recognised at the commencement of the lease term is the cost, or carrying amount if different, of the leased property 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 entity s policy for outright sales. 45 Manufacturer or dealer lessors sometimes quote artificially low rates of interest in order to attract customers. The use of .....

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the manufacturer s or dealer s selling profit. Disclosures 47 Lessors shall, in addition to meeting the requirements in Ind AS 107, disclose the following for finance : (a) a reconciliation between the gross investment in the lease at the end of the reporting period, and the present value of minimum lease payments receivable at the end of the reporting period. In addition, an entity shall disclose the gross investment in the lease and the present value of minimum lease payments receivable at the .....

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As an indicator of growth it is often useful also to disclose the gross investment less unearned income in new business added during the period, after deducting the relevant amounts for cancelled . Operating 49 Lessors shall present assets subject to operating in their balance sheet according to the nature of the asset. 50 Lease income from operating (excluding amounts for services such as insurance and maintenance) shall be recognised in income on a straight-line basis over the lease term, unle .....

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ding 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 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 use benefit derived from the leased asset is diminished. 52 Initial direct costs incurred by lessors in negotiating and arranging an op .....

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lessor does not recognise any selling profit on entering into an operating lease because it is not the equivalent of a sale. Disclosures 56 Lessors shall, in addition to meeting the requirements of Ind AS 107, disclose the following for operating : (a) the future minimum lease payments under non-cancellable operating 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. (b) total c .....

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ated as a package. The accounting treatment of a sale and leaseback transaction depends upon the type of lease involved. 59 If a sale and leaseback transaction results in a finance lease, any excess of sales proceeds over the carrying amount shall not be immediately recognised as income by a seller-lessee. Instead, it shall be deferred and amortised over the lease term. 60 If the leaseback is a finance lease, the transaction is a means whereby the lessor provides finance to the lessee, with the .....

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pensated for by future lease payments at below market price, it shall 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 shall be deferred and amortised over the period for which the asset is expected to be used. 62 If the leaseback is an operating lease, and the lease payments and the sale price are at fair value, there has in effect been a normal sale transac .....

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5 Disclosure requirements for lessees and lessors apply equally to sale and leaseback transactions. The required description of material leasing arrangements leads to disclosure of unique or unusual provisions of the agreement or terms of the sale and leaseback transactions. 66 Sale and leaseback transactions may trigger the separate disclosure criteria in Ind AS 1, Presentation of Financial Statements. 1 See also Appendix B Evaluating the Substance of Transactions Involving the Legal Form of a .....

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ments and costs associated with a pre-existing lease commitment of the lessee). Alternatively, initial periods of the lease term may be agreed to be rent-free or at a reduced rent. 2 The issue is how incentives in an operating lease should be recognised in the financial statements of both the lessee and the lessor. Accounting Principles 3 All incentives for the agreement of a new or renewed operating lease shall be recognised as an integral part of the net consideration agreed for the use of the .....

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unless another systematic basis is representative of the time pattern of the lessee s benefit from the use of the leased asset. 6 Costs incurred by the lessee, including costs in connection with a pre-existing lease (for example costs for termination, relocation or leasehold improvements), shall be accounted for by the lessee in accordance with the Standards applicable to those costs, including costs which are effectively reimbursed through an incentive arrangement. Appendix B Evaluating the Su .....

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s and conditions can vary significantly. In the lease and leaseback example, it may be that the arrangement is designed to achieve a tax advantage for the Investor that is shared with the Entity in the form of a fee, and not to convey the right to use an asset. 2 When an arrangement with an Investor involves the legal form of a lease, the issues are: (a) how to determine whether a series of transactions is linked and should be accounted for as one transaction; (b) whether the arrangement meets t .....

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nsaction when the overall economic effect cannot be understood without reference to the series of transactions as a whole. This is the case, for example, when the series of transactions are closely interrelated, negotiated as a single transaction, and takes place concurrently or in a continuous sequence. 4 The accounting shall reflect the substance of the arrangement. All aspects and implications of an arrangement shall be evaluated to determine its substance, with weight given to those aspects .....

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reason for the arrangement is to achieve a particular tax result, and not to convey the right to use an asset; and (c) an option is included on terms that make its exercise almost certain (eg a put option that is exercisable at a price sufficiently higher than the expected fair value when it becomes exercisable). 6 The definitions and guidance in paragraphs 49-64 of the Framework for the Preparation and Presentation of Financial Statements in accordance with Indian Accounting Standards, issued b .....

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nt in pursuit of its own objectives and is not obligated to pay the lease payments. This occurs when, for example, a prepaid amount is placed in a separate investment account to protect the Investor and may only be used to pay the Investor, the Investor agrees that the lease payment obligations are to be paid from funds in the investment account, and the Entity has no ability to withhold payments to the Investor from the investment account; (b) the Entity has only a remote risk of reimbursing th .....

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t inception of the arrangement, the only cash flows expected under the arrangement are the lease payments that are satisfied solely from funds withdrawn from the separate investment account established with the initial cash flows. 7 Other obligations of an arrangement, including any guarantees provided and obligations incurred upon early termination, shall be accounted for under Ind AS 37, Provisions, Contingent Liabilities and Contingent Assets, Ind AS 104, Insurance Contracts or Ind AS 109, Fi .....

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e, shall be considered. Indicators that individually demonstrate that recognition of the entire fee as income when received, if received at the beginning of the arrangement, is inappropriate include: ] (a) obligations either to perform or to refrain from certain significant activities are conditions of earning the fee received, and therefore execution of a legally binding arrangement is not the most significant act required by the arrangement; (b) limitations are put on the use of the underlying .....

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the arrangement early; or (ii) the Entity is required by the terms of the arrangement, or has some or total discretion, to invest a prepaid amount in assets carrying more than an insignificant amount of risk (eg currency, interest rate or credit risk). In this circumstance, the risk of the investment s value being insufficient to satisfy the lease payment obligations is not remote, and therefore there is a possibility that the Entity may be required to pay some amount. 9 The fee shall be present .....

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restrictions on its use; (ii) the life and other significant terms of the arrangement; (iii) the transactions that are linked together, including any options; and (b) the accounting treatment applied to any fee received, the amount recognised as income in the period, and the line item of the statement of profit and loss in which it is included. 11 The disclosures required in accordance with paragraph 10 of this appendix shall be provided individually for each arrangement or in aggregate for eac .....

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t or series of payments. Examples of arrangements in which one entity (the supplier) may convey such a right to use an asset to another entity (the purchaser), often together with related services, include: outsourcing arrangements (eg the outsourcing of the data processing functions of an entity). arrangements in the telecommunications industry, in which suppliers of network capacity enter into contracts to provide purchasers with rights to capacity. take-or-pay and similar contracts, in which .....

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angements, the underlying asset that is the subject of the lease is a portion of a larger asset. This appendix does not address how to determine when a portion of a larger asset is itself the underlying asset for the purposes of applying Ind AS 17. Nevertheless, arrangements in which the underlying asset would represent a unit of account in either Ind AS 16 or Ind AS 38 are within the scope of this appendix. Scope 4 This appendix does not apply to arrangements that: (a) are, or contain, excluded .....

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n arrangement is, or contains, a lease, how the payments for the lease should be separated from payments for any other elements in the arrangement. Accounting Principles Determining whether an arrangement is, or contains, a lease 6 Determining whether an arrangement is, or contains, a lease shall be based on the substance of the arrangement and requires an assessment of whether: (a) fulfilment of the arrangement is dependent on the use of a specific asset or assets (the asset); and (b) the arran .....

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in the arrangement, then fulfilment of the arrangement is not dependent on the specified asset and the arrangement does not contain a lease. A warranty obligation that permits or requires the substitution of the same or similar assets when the specified asset is not operating properly does not preclude lease treatment. In addition, a contractual provision (contingent or otherwise) permitting or requiring the supplier to substitute other assets for any reason on or after a specified date does not .....

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of the underlying asset. The right to control the use of the underlying asset is conveyed if any one of the following conditions is met: (a) The purchaser has the ability or right to operate the asset or direct others to operate the asset in a manner it determines while obtaining or controlling more than an insignificant amount of the output or other utility of the asset. (b) The purchaser has the ability or right to control physical access to the underlying asset while obtaining or controlling .....

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output as of the time of delivery of the output. Assessing or reassessing whether an arrangement is, or contains, a lease 10 The assessment of whether an arrangement contains a lease shall be made at the inception of the arrangement, being the earlier of the date of the arrangement and the date of commitment by the parties to the principal terms of the arrangement, on the basis of all of the facts and circumstances. A reassessment of whether the arrangement contains a lease after the inception .....

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of any of the terms in the original arrangement before the end of the term of the original arrangement shall be evaluated under paragraphs 6-9 only with respect to the renewal or extension period. (c) There is a change in the determination of whether fulfilment is dependent on a specified asset. (d) There is a substantial change to the asset, for example a substantial physical change to property, plant or equipment. 11 A reassessment of an arrangement shall be based on the facts and circumstanc .....

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e to the reassessment occurs; (b) in the case of (b) in paragraph 10, the inception of the renewal or extension period. Separating payments for the lease from other payments 12 If an arrangement contains a lease, the parties to the arrangement shall apply the requirements of Ind AS 17 to the lease element of the arrangement, unless exempted from those requirements in accordance with paragraph 2 of Ind AS 17. Accordingly, if an arrangement contains a lease, that lease shall be classified as a fin .....

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heir relative fair values. The minimum lease payments as defined in paragraph 4 of Ind AS 17 include only payments for the lease (ie the right to use the asset) and exclude payments for other elements in the arrangement (eg for services and the cost of inputs). 14 In some cases, separating the payments for the lease from payments for other elements in the arrangement will require the purchaser to use an estimation technique. For example, a purchaser may estimate the lease payments by reference t .....

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t was identified in paragraphs 7 and 8 as the subject of the lease. Subsequently the liability shall be reduced as payments are made and an imputed finance charge on the liability recognised using the purchaser s incremental borrowing rate of interest. (b) in the case of an operating lease, treat all payments under the arrangement as lease payments for the purposes of complying with the disclosure requirements of Ind AS 17, but (i) disclose those payments separately from minimum lease payments o .....

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11, Construction Contracts. ] 4[ 2 Appendix B, Service Concession Arrangements: Disclosures contained in Ind AS 11, Construction Contracts. ] 3 Appendix A, Intangible Assets-Web Site Costs contained in Ind AS 38, Intangible Assets. Appendix 1 Note: This Appendix is not a part of the Indian Accounting Standard. The purpose of this Appendix is only to bring out the major differences, if any, between Indian Accounting Standard (Ind AS) 17 and the corresponding International Accounting Standard (IA .....

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nd AS 40, Investment Property, if the fair value model is adopted and paragraph 19 of IAS 17 dealing with property interest held under an operating lease as an investment property, if the definition of investment property is otherwise met and fair value model is applied, have been deleted, since Ind AS 40, Investment Property, prohibits the use of fair value model. However, paragraph numbers have been retained in Ind AS 17 to maintain consistency with paragraph numbers of IAS 17. 2 Paragraphs 33 .....

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n in Ind AS 17, since all transitional provisions related to Ind ASs, wherever considered appropriate, have been included in Ind AS 101, First-time Adoption of Indian Accounting Standards corresponding to IFRS 1, First-time Adoption of International Financial Reporting Standards. 5 Different terminology is used in this standard, eg, the term balance sheet is used instead of Statement of financial position and Statement of profit and loss is used instead of Statement of comprehensive income . 6 F .....

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