Query No. 6

Subject:

Application of Accounting Standard (AS) 19, ‘Leases’,

in respect of assets leased before 1.4.2001.1

A. Facts of the Case

1. A Government of India enterprise, incorporated as a public limited company in 1986, is engaged in leasing rolling stock assets to the Ministry of Railways (MOR). It raises funds from the capital market through issue of bonds, loans from banks/financial institutions (FI’s), and overseas markets for acquisition of rolling stock assets. During 1996-97 to 1999-2000, the company also obtained assets on lease from certain FI’s/banks and sub-leased the same to the MOR. All the lease and sub-lease transactions are in the nature of finance leases.

2. Accounting treatment followed by the company:

(i) Lease transactions

· Upto the accounting year 2000-01, the company was following the ‘Guidance Note on Accounting for Leases’, issued by the Institute of Chartered Accountants of India. As per the provisions of the Guidance Note, the assets acquired by the company were capitalised in its books as fixed assets, depreciation was charged on such fixed assets, the gross lease rent received was accounted for in the profit and loss account, and lease adjustment account and lease equalisation account were operated from year to year.

· Accounting Standard (AS) 19, ‘Leases’, issued by the Institute of Chartered Accountants of India, which came into effect in respect of all assets leased during accounting periods commencing on or after 01.04.2001, was adopted by the company from the accounting year 2001-02. The accounting policies with respect to leased assets were changed to correspond to the requirements of AS 19.

· Since the application of AS 19 has been made optional for earlier years, the company adopted AS 19 for all the assets acquired and leased since inception, and reflected the change in accounting in its annual accounts for the year 2001-02.

(ii) Lease and sub-lease transactions

· In the case of assets obtained on lease from other FI’s/banks and sub-leased to the MOR, the gross lease rentals received and the lease rentals paid were accounted for as income and expenditure respectively in the profit and loss account, and the details of leases were explained in the ‘Notes to the accounts’.

· Since all such transactions were entered into prior to 01.04.2001, the period for which the application of AS 19 was optional and also since the sub-leased assets were not capitalised in the books of account, the company continued with the accounting treatment provided in the ‘Guidance Note’. Sub-leasing was an off - balance sheet item and the details thereof were fully disclosed in the notes to accounts.

3. For the year 2001-02, when the company adopted AS 19 for the first time, the statutory auditors agreed with the accounting treatment adopted by the company for lease and sub-lease transactions. However, the statutory auditors of the company, who conducted the audit for the year 2002-03, are of the opinion that the company is mandatorily required to comply with the accounting treatment provided in AS 19 in respect of sub-lease transactions also. The company has maintained that since all the sub- lease transactions were entered into prior to 01.04.2001, AS 19 is not mandatory and the company has continued to follow, according to the querist, the then mandatory ‘Guidance Note on Accounting for Leases’ for such sub-lease transactions.

B . Query

4. The querist has sought the opinion of the Expert Advisory Committee as to whether the following accounting treatment adopted by the company during 2001-02 and the subsequent years is in compliance with AS 19:

(a) Accounting treatment provided in AS 19 for all assets acquired by the company as the lessor and leased to the MOR, including those acquired prior to 01.04.2001.

 

(b) Accounting treatment provided in the ‘Guidance Note’ for assets taken on lease from other banks/financial institutions and sub- leased to the MOR prior to 01.04.2001 (No sub-lease transactions have been entered into by the company after 01.04.2001).

C. Points considered by the Committee

5. The Committee notes that the company in question has not entered into sub-lease transactions after 01.04.2001. Prima facie this appears to be a reason for not shifting to the method of accounting for finance leases as prescribed in AS 19 for this class of assets. The opinion of the Committee given hereafter is based on the presumption that the company has discontinued obtaining assets on finance lease for the purpose of giving it on sub-lease.

6. The Committee notes the applicability paragraph of AS 19, which is reproduced below:

"...This Standard comes into effect in respect of all assets leased during accounting periods commencing on or after 1.4.2001 and is mandatory in nature from that date. Accordingly, the ‘Guidance Note on Accounting for Leases’ issued by the Institute in 1995, is not applicable in respect of such assets. Earlier application of this Standard is, however, encouraged."

7. The Committee notes from the above that AS 19 is mandatory in respect of assets leased on or after 1.4.2001 and that since earlier application of this Standard is encouraged, it is optional for an enterprise to follow AS 19 in respect of assets leased before 1.4.2001. A question, however, arises as to whether such an option can be exercised selectively in respect of some of the lease transactions.

8. The Committee is of the view that as a matter of principle, ordinarily, the same accounting policy should be followed in similar situations for the sake of uniformity and comparability of financial information. The Committee is further of the view that the method of accounting for assets given on finance lease should be the same irrespective of the manner of acquisition of assets, i.e., whether these are purchased outright or obtained on finance lease. However, since in the present case, the company appears to have discontinued the practice of obtaining the assets on finance lease for the purpose of giving the same on sub-lease after AS 19 coming into force, in respect of such transactions entered into by the company before 1.4.2001, it can continue to follow the method of accounting for finance leases as recommended in the erstwhile Guidance Note on Accounting for Leases, which is permitted as per AS 19. (The Guidance Note was recommendatory in nature and not mandatory as stated in paragraph 3 above). However, the company should give adequate disclosures in respect of the same.

D. Opinion

9. On the basis of the above, the Committee is of the following opinion on the issues raised by the querist in paragraph 4 subject to the presumption stated in paragraph 5 above:

(a) Accounting treatment adopted by the querist during 2001-02 and subsequent years is in compliance with AS 19 in respect of all assets acquired by it as the lessor and leased to the MOR, including those acquired prior to 1.4.2001.

 

(b) An accounting policy cannot be adopted selectively for some of the transactions; however, since it appears that the company has discontinued its policy of obtaining assets on lease and then giving them on sub-lease, as a matter of exception in this particular case, accounting treatment recommended in the ‘Guidance Note’ can be continued to be followed for assets taken on lease from other banks/financial institutions and sub- leased to the MOR prior to 1.4.2001. The company should, however, give adequate disclosures in respect of the same.

1 Opinion finalised by the Committee on 26.5.2004