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CA Intermediate · Advanced Accounting · AS 19 Leases

Sunrise Textiles Ltd. (lessee) took a machine on lease from Kaveri Finance Ltd. On the lease's commencement, the lease transfers substantially all risks and rewards incidental to ownership of the machine to Sunrise Textiles. Under AS 19, how should Kaveri Finance Ltd. (lessor) classify and show this lease in its books?

Kaveri Finance should classify the lease as a finance lease because substantially all risks and rewards of ownership pass to the lessee. The lessor then recognises a receivable equal to the net investment in the lease instead of showing the machine as its own depreciable asset.

  1. AAs an operating lease, with the machine continuing as the lessor's fixed asset
  2. BAs a finance lease, shown as a receivable at the net investment in the leaseCorrect
  3. CAs a finance lease, with the machine shown as the lessor's fixed asset and depreciated
  4. DAs an operating lease, with the lease rentals shown as a receivable at the outset

Explanation

A lease that transfers substantially all risks and rewards of ownership is a finance lease. The lessor does not treat the asset as its own but recognises a receivable equal to the net investment in the lease. Options treating it as operating or keeping the asset depreciated in the lessor's books ignore the transfer of risks and rewards.

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