TMI BlogOmitted w.e.f. 01-04-2019X X X X Extracts X X X X X X X X Extracts X X X X ..... sion arrangements within the scope of 3. Substituted vide F. No. 01/01/2009-CL-V(Part) - Dated 30-3-2016 before it was read as, 1 Appendix C, Service Concession Arrangements contained in Ind AS 115, Revenue from Contracts with Customers. 4. Substituted vide F. No. 01/01/2009-CL-V(Part) - Dated 30-3-2016 before it was read as, 2 Appendix D, Service Concession Arrangements: Disclosures contained in Ind AS 115, Revenue from Contracts with Customers. 5. Substituted vide F. No. 01/01/2009-CL-V(Part VI) Dated 28-03-2018 , w.e.f. 1st day of April, 2018, before it was read as, 1 [ 8. The criteria in paragraph 20 of Ind AS 18, Revenue, shall be applied to the facts and circumstances of each arrangement in determining when to recognise a fee as income that an Entity might receive. Factors such as whether there is continuing involvement in the form of significant future performance obligations necessary to earn the fee, whether there are retained risks, the terms of any guarantee arrangements, and the risk of repayment of the fee, shall be considered. Indica ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ind AS 41 provided by lessors under operating leases. 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 services that do not transfer the right to use assets from one contracting party to the other. Definitions 4 The following terms are used in this Standard with the meanings specified: A lease is an agreement whereby the lessor conveys to the lessee in return for a payment or series of payments the right to use an asset for an agreed period of time. A finance lease is a lease that transfers substantially all the risks and rewards incidental to ownership of an asset. Title may or may not eventually 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 sam ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction. Economic life is either: (a) the period over which an asset is expected to be economically usable by one or more users; or (b) the number of production or similar units expected to be obtained from the asset by one or more users. Useful life is the estimated remaining period, from the commencement of the lease term, without limitation by the lease term, over 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 of discharging the obligations under the guarantee. Unguaranteed residual value is that portion of the residual value of the leased asset, the realisation of which by the lessor is not assured or is guaranteed solely by a party related to the lessor. Initial direct costs are incr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 leases 7 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. Risks include the possibilities of losses from idle capacity or technological obsolescence and of variations in return because of changing economic conditions. Rewards may be represented by the expectation of profitable operation over the asset s economic life and of gain from appreciation in value or realisation of a residual value. 8 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. 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. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e lessee does not have substantially all such risks and rewards. 13 Lease classification is made at the inception of the lease. If at any time the lessee and the lessor agree to change the provisions of the lease, other than by renewing the lease, in a manner that would have resulted in a different classification of the lease under the criteria in paragraphs 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 elements, an entity assesses the classification of each element as a finance or an operating lease separately in accordance with paragraphs 7 13. In determining whether the land element is an operating or a finance lease, an important consideration is that land normally has an indefinite economic life. 16 Whenever necessary in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 balance sheet both as an asset and as an obligation to pay future lease payments. At the commencement of the lease term, the asset and the liability for the future lease payments are recognised in the balance sheet at the same amounts except for any initial direct costs of the lessee that are added to the amount recognised as an asset. 23 It is not appropriate for the liabilities for leased assets to be presented in the financial statements as a deduction from the leased assets. If for the presentation 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 ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , make the following disclosures for finance leases: (a) for each class of asset, the net carrying amount at the end of the reporting period. (b) a reconciliation between the total of future minimum lease payments at the end of the reporting period, and their present value. In addition, an entity 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 subleases at the end of the reporting period. (e) a general description of the lessee s material leasing arrangements including, but not limited to, the following: (i) the basis on which contingent rent payable is determined; (ii) the existence and terms of renewal or purchase options and escalation clauses; and (iii) restrictions imposed by lease arrangements, such as those concerning dividends, additional ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 services. 38 Initial direct costs are often incurred by lessors and include amounts such as commissions, legal fees and internal costs that are incremental and directly attributable to negotiating and arranging a lease. They exclude general overheads such as those incurred by a sales and marketing team. For finance leases other than those involving manufacturer or dealer lessors, initial direct costs are included in the initial measurement of the finance lease receivable and reduce the amount of income recognised 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 b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he asset being leased, at normal selling prices, reflecting any applicable volume or trade discounts; and (b) finance income over the lease term. 44 The sales revenue recognised at the commencement of the lease term by a manufacturer or dealer lessor is the fair value of the asset, or, if lower, the present value of the minimum lease payments accruing to the lessor, computed at a market rate 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 such a rate would result in an excessive portion of the total income from the transaction being recognised at the time of sale. If artificially low rates of interest are quoted, selling profit is restricted to that which would apply if a market rate of interest were charged. 46 Costs incurred by a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecognised 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 operating lease shall be added to the carrying amount of the leased asset and recognised as an expense over the lease term on the same basis as the lease income. 53 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. 54 To determine whether a leased asset has become impaired, an entity applies Ind AS 36. 55 A manufacturer or dealer 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iately. 63 For operating leases, if the fair value at the time of a sale and leaseback transaction is less than the carrying amount of the asset, a loss equal to the amount of the difference between the carrying amount and fair value shall be recognised immediately. 64 For finance leases, no such adjustment is necessary unless there has been animpairment in value, in which case the carrying amount is reduced to recoverable amount in accordance with Ind AS 36. 65 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 Lease 2 See also Appendix A Operating Leases-Incentives. 3 See also Appendix A Operating Leases-Incentives. Appendix A Operating Leases-Incentives This appendix is an integral p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and its terms 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 the definition of a lease under Ind AS 17; and, if not, (i) whether a separate investment account and lease payment obligations that might exist represent assets and liabilities of the Entity (ii) how the Entity should account for other obligations resulting from the arrangement; and (iii) how the Entity should account for a fee it might receive from an Investor. Accounting Principles 3 A series of transactions that involve the legal form of a lease is linked and shall be accounted for as one transaction 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om an Investor and possibly paying some additional amount, or, when a fee has not been received, only a remote risk of paying an amount under other obligations (eg a guarantee). Only a remote risk of payment exists when, for example, the terms of the arrangement require that a prepaid amount is invested in risk-free assets that are expected to generate sufficient cash flows to satisfy the lease payment obligations; and (c) other than the initial cash flows at 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, Financial Instruments depending on the terms. 5 [8. The requirements in Ind AS 115, Revenue from Contracts with Customers, shall be applied to the facts and circumstances of each arrangement in determining when to recognise a fe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 each class of arrangement. A class is a grouping of arrangements with underlying assets of a similar nature (eg power plants). Appendix C Determining whether an Arrangement contains a Lease This appendix is an integral part of the Ind AS. Background 1 An entity may enter into an arrangement, comprising a transaction or a series of related transactions, that does not take the legal form of a lease but conveys a right to use an asset (eg an item of property, plant or equipment) in return for a payment 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 arrangeme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Fulfilment of the arrangement is dependent on the use of a specific asset 7 Although a specific asset may be explicitly identified in an arrangement, it is not the subject of a lease if fulfilment of the arrangement is not dependent on the use of the specified asset. For example, if the supplier is obliged to deliver a specified quantity of goods or services and has the right and ability to provide those goods or services using other assets not specified 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 preclude lease treatment before the date of substitution. 8 An asset has been implicitly specified if, for example, the supplier owns or leases only one asset with which to fulfil the obligation and it is not economically feasi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nal 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 circumstances as of the date of reassessment, including the remaining term of the arrangement. Changes in estimate (for example, the estimated amount of output to be delivered to the purchaser or other potential purchasers) would not trigger a reassessment. If an arrangement is reassessed and is determined to contain a lease (or not to contain a lease), lease accounting shall be applied (or cease to apply) from: (a) in the case of (a), (c) or (d) in paragraph 10, when the change in circumstances giving rise 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 requ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nonlease elements in the arrangement. Appendix D References to matters contained in other Indian Accounting Standards This appendix is an integral part of the Ind AS. This appendix lists the appendices which are part of other Indian Accounting Standards and make reference to Ind AS 17, Leases. 7 [1. Appendix D, Service Concession Arrangements contained in Ind AS 115, Revenue from Contracts with Customers.] 8 [2. Appendix E, Service Concession Arrangements: Disclosures contained in Ind AS 115, Revenue from Contracts with Customers.] 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 (IAS) 17, Leases, SIC 15, Operating Leases - Incentives, SIC 27, Evaluating the Substance of Transactions Involving the Legal Form of a Lease and IFRIC 4, Determining whether an Arrangement contains a Lease, issued by the International Accountin ..... X X X X Extracts X X X X X X X X Extracts X X X X
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