Skip to content

CA Intermediate · Advanced Accounting · AS 19 Leases

Vikram Travels Ltd. leased out buses under operating leases. It incurred initial direct costs of Rs 60,000 on a 5-year operating lease, and the lease rentals are Rs 3,00,000 per year, with escalations that are not linked to inflation. Under AS 19, how should the lessor treat the initial direct costs?

For an operating lease the lessor either recognises initial direct costs as an expense in the period incurred or defers them and allocates them over the lease term in proportion to rent income. They are not added to a net investment, which relates to finance leases.

  1. ACharge them to the statement of profit and loss immediately in year 1 only
  2. BIgnore them as they are lessee costs
  3. CEither defer and allocate over the lease term in proportion to rental income, or recognise as an expense in the year incurredCorrect
  4. DAdd them to the net investment as a receivable

Explanation

Under AS 19, initial direct costs in an operating lease are either recognised immediately as an expense or deferred and allocated over the lease term in proportion to the recognition of rent income. This is the standard's stated treatment. Adding to net investment applies to finance leases.

Did you get it right without looking?

One question tells you little. A timed set on AS 19 Leases shows your real accuracy, how long you take and where you lose marks.

Practise AS 19 LeasesFree diagnostic mock

More AS 19 Leases questions