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CMA Intermediate · Financial Accounting · Lease Accounting

Himalaya Traders leased a vehicle from Rohan Leasing Ltd. under an operating lease. After one year, both parties agreed to amend the terms, other than by renewing the lease, so that the amended terms, had they existed at inception, would have made it a finance lease. Which treatment follows AS 19?

The revised agreement is treated as a new agreement over its revised term. AS 19 provides this where the parties agree to change lease provisions, other than by renewal, in a way that would have produced a different classification at inception. Estimate changes alone would not do this.

  1. AThe revised agreement is treated as a new agreement over its revised termCorrect
  2. BThe lease stays operating until expiry of the original term
  3. CThe change is treated as a change in estimate with no effect on classification
  4. DThe lease is reclassified retrospectively from inception

Explanation

AS 19 says that where lessee and lessor agree to change the provisions, other than by renewing, in a way that would have given a different classification had the terms existed at inception, the revised agreement is considered a new agreement over its revised term. It is not a mere estimate change and is not applied retrospectively.

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