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CA Intermediate · Advanced Accounting · AS 19 Leases

Bharat Agro Ltd. takes a 30-year lease of a plot of land from the Maharashtra Industrial Development Corporation and pays a one-time premium of ₹12,00,000 at the start. Title will not pass to Bharat Agro at the end of the lease, and annual ground rent is paid separately. As per AS 19, what is the premium charge to the Statement of Profit and Loss each year, ignoring the ground rent?

The charge is ₹40,000 each year. A land lease without transfer of title is an operating lease, so the upfront premium is a prepaid lease payment spread over the 30-year term: ₹12,00,000 divided by 30.

  1. A₹12,00,000 in the first year only
  2. B₹40,000 each yearCorrect
  3. C₹80,000 each year
  4. DNil, since it is capitalised as land and not depreciated

Explanation

Land with no title transfer is normally an operating lease. The upfront premium is a prepaid lease payment and is amortised over the lease term. ₹12,00,000 ÷ 30 years = ₹40,000 per year. Expensing it all in year 1 is wrong because it benefits the whole term.

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