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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 ..... 9-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. 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: ]" 6. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 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 is the earlier of the date of the lease agreement and the date of commitment by the parties to the principal provisions of the lease. As at this date: (a) a lease is classified as either an operating or a finan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onsumed 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 incremental costs that are directly attributable to negotiating and arranging a lease, except for such costs incurred by manufacturer or dealer lessors. Gross investment in the lease is the aggregate of: (a) the minimum lease 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... olescence 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. 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 residual value guarantee provided by a party unrelated to the lessee. 10 Whether a lease is a finance lease or an operating lease depends on the substance of the transaction rather than the form of the contract.1 Examples of situations that individually or in combination would normally lead to a lease being cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hanges 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 order to classify and account for a lease of land and buildings, the minimum lease payments (including any lump-sum upfront payments) are allocated between the land and the 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 leases, in which case the enti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y 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 activities performed by the lessee for a finance lease are added to the amount recognised as an asset. Subsequent measurement 25 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. 26 In practice, in allocating the finance charge to periods during the leas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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 debt, and further leasing. 32 In addition, the requirements for disclosure in accordance with Ind AS 16, Ind AS 36, Ind AS 38, Ind AS 40 and Ind AS 41 apply to lessees for assets leased under finance leases. Operating leases 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 selling profit is recognised, which for a finance lease is normally at the commencement of the lease term. Subsequent measurement 39 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. 40 A lessor aims to allocate finance income over the lease term on a systematic and rational basis. This income allocation is based on a pattern reflecting a constant period ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y 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 manufacturer or dealer lessor in connection with negotiating and arranging a finance lease are recognised as an expense at the commencement of the lease term because they are mainly related to earning 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 leases: (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 end of the reporting period, for each ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd 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 for operating leases: (a) the future minimum lease payments under non-cancellable operating leases 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 contingent rents recognised as income in the period. (c) a general description of the lessor's leasing arrangements. 57 In addition, the disclosure requirements in Ind AS 16, Ind AS 36, Ind AS 38, Ind AS 40 and Ind AS 41 apply to lessors for assets provided under operating leases. Sale and leaseback transactions 58 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. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ements. 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 part of the Ind AS. Issue 1 In negotiating a new or renewed operating lease, the lessor may provide incentives for the lessee to enter into the agreement. Examples of such incentives are an up-front cash payment to the lessee or the reimbursement or assumption by the lessor of costs of the lessee (such as relocation costs, leasehold improvements 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 leased asset, irrespective of the incentive's nature or form or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orm 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 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 and implications that have an economic effect. 5 Ind AS 17 applies when the substance of an arrangement includes the conveyance of the right to use an asset for an agreed period of time. Indicators that individually demonstrate that an arrangement may not, in substance, involve a lease under Ind AS 17 include: (a) an Entity retains all the risks and rewards incident to ownership of an underlying asset and enjoys substantially the same rights to its use as before the arrangement; (b) the primary 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 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pending 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 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. 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 asset that have the practical effect of restricting and significantly changing the Entity's ability to use (eg deplete, sell or pledge as collateral) the asset; (c) the possibility of reimbursing a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 purchasers must make specified payments regardless of whether they take delivery of the contracted products or services (eg a take-or-pay contract to acquire substantially all of the output of a supplier's power generator). 2 This appendix provides guidance for determining whether such arrangements are, or contain, leases that should be accounted for in accordance with Ind AS 17. This Appendix does not provide guidance for determining how such a lease should be classified under Ind AS 17. 3 In some arrangements, 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. Ne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the supplier owns or leases only one asset with which to fulfil the obligation and it is not economically feasible or practicable for the supplier to perform its obligation through the use of alternative assets. Arrangement conveys a right to use the asset 9 An arrangement conveys the right to use the asset if the arrangement conveys to the purchaser (lessee) the right to control the use 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 more than an insignificant amount of the output or other utility of the asset. (c) Facts and circumstances indicate that it is remote that one or more parties other than the purchaser will take more than an insignificant amount of the output or other utility that will be produced or generated by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 finance lease or an operating lease in accordance with paragraphs 7-17 of Ind AS 17. Other elements of the arrangement not within the scope of Ind AS 17 shall be accounted for in accordance with other Standards. 13 For the purpose of applying the requirements of Ind AS 17, payments and other consideration required by the arrangement shall be separated at the inception of the arrangement or upon a reassessment of the arrangement into those for the lease and those for other elements on the basis of their 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 req ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ternational Accounting Standards Board. Comparison with IAS 17, Leases, SIC 15, SIC 27 and IFRIC 4 1 Paragraph 18 of IAS 17 dealing with measurement of the land and buildings elements when the lessee's interest in both land and buildings is classified as an investment property in accordance with Ind 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 and 50 have been modified to provide that where the escalation of lease rentals is in line with the expected general inflation so as to compensate the lessor for expected inflationary cost, the increases in the rentals shall not be straight lined. 3 Paragraph numbers 14 and 15 appear as 'Deleted' in IAS 17. In order to maintain consistency with paragraph numbers of IAS 17, the paragraph number ..... X X X X Extracts X X X X X X X X Extracts X X X X
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