A. Facts of the Case
1. A company has obtained a running hydropower project from
the Government of Maharashtra Water Resource Department
(GOMWRD) on a long term lease. The lease is termed as ‘Advance
Lease, Operate, Maintain and Transfer Basis’. The period of lease
is 30 years after completion of which, or in case of earlier
termination at the time of termination, the plant has to be handed
over to the Government. The ‘quoted price’ as per the notification
of award for the use of plant for 30 years is Rs. 322.70 crore
whose net present value on the date of transfer of the leased
project (leased asset) as per the terms of the notification is Rs.
92.011 crore. The company is required to make an upfront/down
payment of Rs. 60 crore to take the possession of the leased
asset and the balance amount of net present value being Rs.
32.011 crore is to be paid in instalments as per the chart given in
paragraph 2 below. The total thereof comes to Rs. 322.70 crore
which is the quoted price referred to above.
2. The company is required to pay Rs. 60 crore as upfront/down
payment on agreement and further payments are to be made by
way of yearly instalments over the lease period of 30 years to
serve as a source of revenue to GOMWRD as given in the table
below:
| Year on Agreement |
Amount in Rs. crore. |
Year |
Amount in Rs. crore. |
Year |
Amount in Rs. crore. |
| 1 |
60.00 |
11 |
1.00 |
21 |
17.00 |
| 2 |
- |
12 |
1.00 |
22 |
17.20 |
| 3 |
- |
13 |
3.00 |
23 |
20.00 |
| 4 |
0.50 |
14 |
3.00 |
24 |
20.00 |
| 5 |
0.50 |
15 |
3.00 |
25 |
20.00 |
| 6 |
0.75 |
16 |
3.00 |
26 |
20.00 |
| 7 |
0.75 |
17 |
3.00 |
27 |
20.00 |
| 8 |
1.00 |
18 |
12.00 |
28 |
20.00 |
| 9 |
1.00 |
19 |
17.00 |
29 |
20.00 |
| 10 |
1.00 |
20 |
17.00 |
30 |
20.00 |
| Total (Rs. in crore) |
322.70 |
| Total: Rs. Three hundred and twenty two crore and seventy lakh |
3. The querist has stated that the lease is not a finance lease as
it does not comply with any of the criteria laid down in Accounting
Standard (AS) 19, ‘Leases’, issued by the Institute of Chartered
Accountants of India, for classification of lease as finance lease.
Therefore, the lease has been classified as an operating lease.
4. The querist has suggested two possible accounting treatments
for this lease, which are as under:
Option I: The quoted price being the total amount of
instalments as per the chart given in paragraph 2
above be shown in the balance sheet as ‘Advance
Lease Premium’ or ‘Advance Lease Charges’ at
Rs.322.70 crore and the corresponding liability at
the equivalent amount less down payment of Rs.
60 crore, i.e., Rs. 262.70 crore be shown in the
balance sheet as liability towards lease rentals and
on the yearly payment, the liability will become nil at
the end of the 30th year. The Advance Lease
Premium of Rs. 322.70 crore be written off over the
lease term of 30 years, i.e., annually Rs. 10.76 crore.
The querist is of the view that this treatment would
result in expensing every year a fixed amount. As
the capacity of the plant of generating electricity will
continue to remain the same throughout the period
of lease, and related yearly lease premium being
constant, inconsistent results would be avoided and
results would show true and fair view.
Option II: Out of the total payment, upfront/down payment of
Rs. 60 crore be capitalised as lease premium in the
balance sheet and Rs. 2 crore be written off every
year in the statement of profit and loss so as to
write it off completely over the period of 30 years.
The instalments as per the chart given in paragraph
2 above, be charged to the statement of profit and
loss every year as and when incurred.
The querist is of the view that as per this treatment,
in the initial period of 12 to 15 years, including the
moratorium period of two years, the accounting
results may show profit and thereafter, it will start
showing losses as the amount of instalments as
per the chart is increasing at later stage whereas
the generation of electricity remains constant as
there is no addition to the capacity of the plant.
B. Query
5. The querist has sought the opinion of the Expert Advisory
Committee on the following issues:
(a) Which of the above mentioned accounting treatments
should be followed by the company so as to comply with
AS 19.
(b) In case any of the above suggested accounting
treatments is considered not sufficient to comply with the
requirements of AS 19, the Committee is requested to
advise the correct accounting treatment.
C. Points considered by the Committee
6. The Committee has not examined the classification of lease
into finance lease or operating lease presuming that the querist
has correctly classified the lease as operating lease. Further, the
Committee has examined the query only from the point of view of
accounting treatment of advance lease premium/down payment
and increasing lease rentals in case of operating lease and has
not touched upon any other issue arising from the Facts of the
Case.
7. The Committee notes paragraphs 23 and 24 of AS 19, which
provide as below:
“23. Lease payments under an operating lease should be
recognised as an expense in the statement of profit and
loss on a straight line basis over the lease term unless
another systematic basis is more representative of the
time pattern of the user’s benefit.
24. For operating leases, lease payments (excluding costs for
services such as insurance and maintenance) are recognised
as an expense in the statement of profit and loss on a straight
line basis unless another systematic basis is more
representative of the time pattern of the user’s benefit, even if
the payments are not on that basis.”
8. The Committee notes from the facts of the case that the
electricity generation capacity of the plant remains constant over
the lease period, i.e., the benefit derived by the lessee, in terms of
electricity units generated by the plant, remains constant over the
lease term. Therefore, the Committee is of the view that the
increasing lease rentals do not represent the time pattern of the
user’s benefit. The Committee is, accordingly, of the view that the
total lease rent to be paid over the lease term, including the upfront
payment of Rs. 60 crore, should be charged to the statement of
profit and loss on straight line basis over the lease term of 30
years. The difference between the amount charged to the statement
of profit and loss and the amount actually paid, should be
recognised as receivable/payable, as the case may be. The
Committee is of the view that recognising Rs. 322.70 crore as
advance lease charges in the balance sheet, as proposed by the
querist under option I in paragraph 4 above, is not in accordance
with the requirements of AS 19. Similarly, capitalising the down
payment of Rs. 60 crore, as proposed by the querist under option
II in paragraph 4 above, is also not correct.
D. Opinion
9. On the basis of the above, the opinion of the Committee on
the issues raised by the querist in paragraph 5 above, subject to
the presumption stated in paragraph 6 above, is as below:
(a) None of the options mentioned by the querist in paragraph
4 above is correct.
(b) The total lease rent to be paid over the lease term,
including the upfront payment of Rs. 60 crore, should be
charged to the statement of profit and loss on straight
line basis over the lease term of 30 years. The difference
between the amount charged to the statement of profit
and loss and the amount actually paid, should be
recognised as receivable/payable, as the case may be.
1 Opinion finalised by the Committee on 14.5.2007.
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