Preface of AS 9 Profit Recognition

 The quantum charged to guests for the trade of goods and services must be used to calculate profit. In the case of agency cooperation, still, profit must be calculated grounded on the quantum of commission charged rather than the total flux of cash, receivables, or other consideration. There are a many exceptions to the antedating statement in which fresh study is needed –

• Profit generated by construction contracts
• Profit generated by hire- purchase and parcel agreements
• Profit generated by government subventions and other similar subventions
• Profit generated by insurance contracts

 Connection of AS 9 Profit Recognition

The ICAI issued this standard in 1985, and it was re-commendatory for just Level I enterprises in the early times, but it was made necessary for all other enterprises on April 1, 1993.

“Enterprise” denotes”a pot as specified in section 3 of the Companies Act, 1956,” according to the ICAI.

 Enterprises classified as Level I have a development of further than 50 crores in the former account time. This figure excludes other income and is applicable to both holding and attachment pots.

 Explanation

1. 1. Profit recognition focuses on the timing of profit recognition in an enterprise’s profit and loss statement.
2. 2. In utmost cases, the quantum of profit generated by a sale is defined by an agreement between the parties engaged in the sale.
3. 3. When there are dubieties in calculating the volume or the expenditures associated with it, the timing of the profit may be affected.

Trade of Goods

The dealer has transferred the property in the products to the buyer for a price, which is a abecedarian factor in calculating profit recognition in a sale involving the trade of goods. In utmost circumstances, transferring property in effects entails transferring considerable pitfalls and prices associated with power of the means.

 When the transfer of substantial pitfalls and prices to the buyer doesn’t coincide with the transfer of goods to the buyer, profit must be recognised at the time of the transfer of significant pitfalls and prices to the buyer.

 Goods transferred to the consignee pending blessing, for illustration. In some diligence, the performance may be mainly complete previous to the prosecution of the profit-generating sale. When a trade is guaranteed by a government guarantee or a forward contract, or when a request exists with a low threat of failure to vend, the particulars are constantly valued at their net realisable worth (NRV).

 Although similar quantities aren’t defined in the profit description, they’re occasionally reported in the profit and loss statement. Gathering agrarian crops or rooting mineral ores are two exemplifications.

Rendering of Services

 The timing of profit recognition for services is dependent on when the service is rendered. This is further broken down into two orders:

• Commensurate Completion Method This account system accounts for income in the profit and loss statement proportionate to the degree of completion of each service. The accomplishment of the service, in this case, entails the prosecution of multiple acts. With the completion of each of these acts, profit is recognized.
• Terminated Service Contract System When the furnishing of services under a contract is completed or mainly completed, profit is recognized in the statement of profit and loss.

 Interest, royalties & tips

• . Others’ operation of similar enterprise coffers results in
•  Interest After taking into account the quantum owed and the applicable rate, profit is recognized on a time proportion base. For case, if the interest on an FD is due on the 30th of June and the 31st of December, Indeed though the interest for the period of January to March will be collected in June when the books are closed on March 31st, we must honor the profit in March.
• Royalties The figure for the use of patents, know-how, trademarks, and imprints is known as kingliness. Profit must be recorded on an addendum base and in compliance with the terms of the applicable agreement. For case, if the kingliness is paid grounded on the number of clones vended, it must be recognized only on that base.
• Tips When the proprietor’s right to admit payment is established, profit must be recognized. Only when the pot declares tips on its shares and the directors decide to pay the tips to their shareholders is it certain.

 Difference between IND AS-18 & AS-9

AS 9 Profit Recognition IND Accounting Standard 18

 It’s accepted at face value. It’s valued at a reasonable price.

 AS-9 doesn’t address this issue. The exchange of goods and services with products and services of an analogous and different character is likewise covered by IND AS – 18. (BarterTransactions are included in Ind AS-18)

 Interest income is calculated on a commensurable basis over time. Interest income is calculated on a commensurable basis over time.

The effective interest rate approach is used to calculate interest income. The effective interest rate approach is used to calculate interest income.

Also Read,

Concept of Accounting standards
AS 10: Accounting standard on Property, Plant, and Equipment
AS 2 – Valuation of Inventories: Definition, Method, and Benefits

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Cost accounting is a type of cost managerial accounting that aims to capture a company’s whole cost of production by monitoring both variable and fixed costs, such as a lease payment. Cost accounting is the practise of a company’s (variable and fixed) costs associated with the manufacture of a commodity being tracked, reviewed, and documented. So that firm executives can make better strategic judgments, implement efficiency, and budget more accurately. The goal of cost accounting is to boost a company’s net profit margins (how much profit each dollar of sales generates). There are various types of cost accounting.

What does Cost Accounting imply?

Cost accounting is used by a company’s internal audit committee to identify both contingent and fixed costs associated with the manufacturing process. It will first compute and report all expenses independently, then compare production costs to output outcomes to assist in determining financial performance and future company decisions. Various types of cost accounting includes standard accounting, activity-based accounting etc.

Types of Costs

1) Fixed costs

Costs that are unaffected by the quantity of demand. These are frequently monthly interest or leasing payments on a property or machinery that is depreciated at a specified rate. These expenditures will remain constant regardless of whether output volumes increase or decrease.

2) Variable costs

Costs associated with a company’s output level. For example, a floral store that is growing its floral arrangement inventory for Valentine’s Day will see increased prices as it orders more flowers from the nearby nursery or garden center.

3) Operating costs

Expenses associated with a company’s day-to-day operations. These pricing can be fixed or variable, depending on the conditions.

4) Direct costs

Costs are inextricably linked to the production of a product. The direct costs of the final product include the roaster’s work hours as well as the cost of the coffee beans if a coffee roaster roasts coffee for five hours.

5) Indirect costs

Costs that aren’t directly tied to a certain product. Because it is inexact and impossible to track specific products, the energy cost to heat the roaster in the coffee roaster example will be indirect.

Financial Accounting vs. Cost Accounting

Financial accounting is typically utilised by outside investors or creditors, whereas cost accounting is frequently used by management within a corporation to aid in decision-making. Financial accounting uses financial statements to convey a company’s financial status and performance to outside sources, including sales, expenditures, assets, and liabilities. Cost accounting is particularly beneficial for management in budgeting and establishing cost-cutting measures that will help the company’s net margins grow in the future.

Cost accounting differs from financial accounting in that, whereas financial accounting categorizes expenses based on the kind of transaction, cost accounting categorizes costs based on management’s information needs. Cost accounting is not required to follow any consistent standard, such as generally accepted accounting principles (GAAP), because it is employed as an internal management tool. As a result, its applications vary from firm to company and department to department.

Which are the elements of cost in general?

The numerous costs associated in a normal production unit can be divided into the following categories:

• Expenses for materials and labour

These can be further divided into the following categories:

• Direct
• Indirect

Benefits of cost accounting

Because they are designed and modified for a specific organisation, cost accounting systems are very scalable and adaptable. Cost accounting is valued by managers because it can be adapted, tweaked, and applied to fit changing market needs. Expense accounting, unlike financial accounting, is primarily concerned with insiders and internal uses. It is governed by the Financial Accounting Standards Board (FASB). Management will analyse data using specific values-based principles, influencing how expenses are established, services are provided, money is earned, and risks are absorbed.

What is the aim of cost accounting?

Cost accounting is beneficial since it demonstrates how a company’s income is spent, how much it earns, and where it is squandered. Internal cost controls and performance are the focus of cost management, which aims to report on, assess, and improve them. Cost accounting estimates are important for internal controls, even if they cannot be utilised in financial statements or for tax purposes.

Types of Cost Accounting

Below given are the types of cost accounting:

1) Standard Costing

Instead of individual expenses, standard costing applies “standard” costs to the cost of goods delivered (COGS) and inventory. The basic costs are the budgeted number and are based on the most efficient use of labour and resources to make the product or service under normal operating conditions. Despite the fact that the products have standard prices, the corporation must nevertheless pay for specific expenditures. The technique of calculating the difference between the usual (efficient) expense and the actual cost incurred is known as variance analysis. If the variance analysis indicates that real costs are higher than expected, the variance is unfavourable. If it decides that the real costs are lower than projected, the variation is positive. Two factors can generate a positive or unfavourable variation. Then there’s the input cost, which includes things like labour and supplies.

2) Activity-Based Costing

ABC is a method of defining and transferring overhead costs from each department to real expense items such as products and services. The ABC cost accounting method focuses on operations, which are defined as any operation, unit of work, or activity performed for a specific purpose, such as putting up manufacturing equipment, designing things, delivering finished goods, or operating machinery. These processes are frequently viewed as expense generators, and they are used to allocate operational costs.

3) Lean Accounting

Lean accounting’s main goal is to improve an organization’s financial reporting processes. Lean accounting is a practical implementation of the lean manufacturing and development principle, which aims to reduce waste while increasing productivity.

4) Marginal Costing

The effect of adding one additional unit of output on a product’s cost is known as marginal costing (also known as cost-volume-profit analysis). It’s useful for making short-term financial decisions. Managers can utilise marginal costing to determine the impact of different cost and volume amounts on operating performance. This form of research can be used by management to provide insight into potentially profitable new items, price rates for present products, and the consequences of marketing initiatives.

Cost accounting standards

The Cost Accounting Standards Board (CASB) was established by the Institute of Cost Accountants to give direction and standardisation in costing. The Board has established 24 accounting standards to promote a better knowledge of various aspects of cost and to encourage the application of best practises.

Also read

Cost Inflation Index

Capital Account | Types of Capital Accounts & it’s Importance

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1. Related party relationships; and
2. Transactions between a reporting entity and its related parties.

This Standard applies to the financial statements of each reporting enterprise as well as the consolidated financial statements of a holding company.

What is the meaning of a Related Party?

According to AS 18, a related party is defined as “one-party having the potential to:

• Control* the other party
• Exercise significant influence over the other party in making financial and/or operating decisions at any time throughout the year.” Control entails
• Control of the composition of the board of directors in the event of a corporation, whether direct or indirect ownership of more than 50% of the voting power of the corporation. Control of the makeup of the governing body in the event of any other organization
• Significant interest in voting power and the ability to dictate the enterprise’s financial and/or operating policies

Who is covered under Related party relationships?

• Holding companies, subsidiaries, and sister companies;
• The reporting company’s associates and joint ventures;
• Investors in reporting enterprises that are associates or joint ventures;
• Individuals with a direct or indirect interest in the reporting enterprise’s voting power, which provides them control or considerable influence over the company, and relatives of such individuals;
• His relatives and key managerial people; and
• Businesses in which anyone who is senior management personnel or has a direct or indirect interest in voting power can have a substantial impact.

Why do we need Related party disclosures?

• Statutory requirements: Often, the regulations governing a company require related party transactions to be disclosed in the financial statements.
• To indicate the fact that the transaction might not be at arm’s length: There is a widespread presumption that transactions shown in the financial statements are on an arm’s length basis without related party disclosures, i.e. the transaction happens between two unconnected parties and is unaffected by any relationship.
• Financial position and operating performance: Even if no related party transactions take place, a related party connection can have an impact on an enterprise’s operating results and financial situation. The sheer presence of the relationship may be enough to influence the reporting company’s dealings with third parties.
• Keeping track of all potential transactions: Transactions between related parties must be declared because, in some cases, transactions would not have occurred if the related party relationship had not existed.

What needs to be disclosed under AS 18

• The following information should be disclosed by the reporting company:
• The transacting connected party’s name;
• A description of the two parties’ relationship;
• A description of the transactions’ nature;
• Transaction volume expressed as a dollar amount or a percentage of the total;
• Any features of related party transactions that are required for the financial statements to be understood;
• At the balance sheet date, there was an outstanding amount from linked parties;
• At the balance sheet date, provisions for doubtful debts due from linked parties; and
• Debts payable from or to connected parties that have been written off or written back.

Cases when disclosure is not required

• Intra-group transactions
• Firms subject to statutory secrecy requirements
• State-controlled enterprises’ related party ties with other state-controlled enterprises

Examples of Related party transactions

The following are examples of related party transactions for which a reporting enterprise may make disclosures:

• Rendering or receiving services;
• Agency arrangements;
• Leasing or hire purchase arrangements;
• Transfer of research and development;
• license agreements;
• Finance (including loans and equity contributions in cash or in-kind);
• Guarantees and collaterals; and
• Management contracts, including deputation of employees.

Case studies on AS 18

Case Study 1: For ABC Ltd.

Solution: Disclosure required as per AS 18

Case Study 2: A Ltd has 75% of the voting power in B Ltd, while B Ltd owns 50% of the voting power in C Ltd. Furthermore, A Ltd owns a quarter of the voting stock of C Ltd. Would A Ltd be deemed to have control over C Ltd, or would it merely have substantial influence?

Solution: C Ltd is regarded to be under the control of A Ltd. According to AS 18, control is defined as having direct or indirect ownership of more than 50% of a company’s voting power. An Ltd has power over B Ltd because it is a dominant stakeholder.

Furthermore, A Ltd and B Ltd are the dominant shareholders of C Ltd (50 percent + 25 percent). It is under the control of A Ltd in an indirect manner. As a result, apart from its individual shareholding in C Ltd, A Ltd has the potential to control C Ltd indirectly through its share ownership in B Ltd.

Comparison between AS 18 and Ind AS 24

Related Blogs:

Ind AS 115 : Revenue From Contracts With Customers

AS 3 – Cash Flow Statements

AS 2 – Valuation of Inventories: Definition, Method, and Benefits

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Applicability of AS 13 Accounting for Investments

The following are not covered by AS 13 Accounting for Investments:

• Dividends, interest, and rentals earned on investments covered by AS 9
• Finance or operating leases covered by AS 19
• Investments in retirement benefit plans and life insurance enterprises covered by AS 15
• The following which is formed under the Central or State Government Act or declared under the Companies Act, 2013

1. Investing in Mutual Funds
2. Asset Management Companies and Venture Capital Funds
3. Banks and government-owned financial organizations

Classification of Investments

1. Current Investments – Current investments are those that are readily realizable by their nature and are intended to be kept for less than a year from the date of purchase.
2. Long-Term Investments — Long-term investments are those that are not currently available for sale, even if they are readily marketable.

Cost of Investments

• Brokerage, duties, and fees — Charges for brokerage, duties, and fees are included in the cost of investments.
• Non-cash consideration — In the event that investments are bought, in whole or in part, by

1. issuing stock
2. issuing additional securities
3. any other resource,

The fair market value of securities issued or assets surrendered is the cost of acquisition. The fair value of securities issued may or may not be the same as the par or nominal value. In the event that the fair value of such an investment is more obvious, it could be prudent to examine it.

• Interest, dividends, or other receivables – Dividends, interest, and other receivables related to investments are normally considered income, and the ROI is the return on investment (return on the investment).
• In some cases, however, such inflows represent a cost recovery and are not included in the income. If such allocations are difficult to make, the cost of investment is normally reduced to the extent of dividends payable only if the dividends constitute a clear recovery of a portion of the cost.
• Right Shares – If the right shares are later subscribed for, the cost of those right shares is added to the carrying amount of the original holding.

The sale profits from the sale of such rights are transferred to the P/L statement if the rights are not subscribed for. However, if an investment is purchased on a cum-right basis and the market value of the investment immediately after turning ex-right is less than the cost, it may be prudent to use the funds from the sale of rights to lower the carrying amount of the investment to the market value.

Carrying Amount of Investments

Current investments must be reported in financial statements at the lower of cost or fair value, which is calculated either by investment category or by individual investment, but not on an aggregate basis.

Long-term investments must always be recorded at full cost in financial accounts. However, when the value of a long-term investment falls, even if it is only temporary, the carrying amount is decreased to account for the loss.

Investment Property

Investment property refers to investments in land or buildings that aren’t intended to be used extensively for the investing company’s use or commercial operations.

Investment Treatment on Disposal

The difference between the carrying cost and the revenues from the sale, net of any charges, is moved to P&L when the investment is sold or disposed of.

Reclassification of Investments

When a long-term investment is reclassified as a current investment, the transfer is effected at the carrying amount and the lowest cost at the time of the reclassification. When a current investment is reclassified as a long-term investment, the transfer is made at the lower of cost or the fair value of the investment at the time of the reclassification.

Disclosures in the Financial Statements

The following are the disclosures in financial statements that are applicable to AS 13 Accounting for Investments:

• The accounting policies used to determine the investment’s carrying amount
• The amounts included in the profit and loss statement for:

(i) Dividends, interest, and rentals on the assets, with the income from long-term and current investments presented separately. The number of TDS (tax deducted at source) must be included in the Advance Taxes Paid section.

(ii)    Profits and losses on the sale of current investments, as well as changes in the investment’s carrying value

(iii) earnings and losses on the sale of long-term investments, as well as changes in the investment’s carrying value.

(c) the total amount of both the quoted and unquoted investments, providing the total market value of the quoted investments

(d) substantial limitations on the right of ownership, realizability of the investments, or remittance of income and proceeds of disposal

(e) the total amount of both the quoted and unquoted investments, providing the total market value of the quoted investments

(f) other disclosures as explicitly as required by the relevant statute governing the company

Major differences between AS 13 and Ind AS 40

Related Blogs –

AS 3 – Cash Flow Statements

AS 2 – Valuation of Inventories: Definition, Method, and Benefits

Ind AS 115: Revenue From Contracts With Customers

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Different Types Of Contracts

A construction contract is one that is entered into expressly for the building of an asset or a group of assets that are tightly linked or interdependent in terms of technology, design, function, or the nature of its final purpose or use.

• Contract with a Fixed Price

A contract in which the contractor and the client agree on a set price for the project. In rare situations, the contract may include a cost escalation provision that is mutually agreed upon by both parties. For example, the parties agree to insert a condition in the contract that allows them to change the contract price if the cost of raw materials rises.

• Contract with a cost-plus provision

A contract in which the contractor is reimbursed for expenses incurred or agreed upon, as well as a fixed proportion of these expenses.

• Construction Contracts: Combining and Segmenting

– Construction Contract Combination – When a group of contracts, either with one or more clients, are negotiated as a single package, are interconnected and constitute part of a single project, and are completed in a continuous sequence, they have termed a single construction contract.

A contract for the construction of three similar structures (in every way) on a single plot, for example, maybe arranged all at once.

– Construction Contract Segmentation – When a contract includes more than one asset, each asset’s construction should be treated as a separate construction contract if separate proposals have been submitted for each asset, each asset has been separately negotiated, and each asset’s costs and revenues can be identified separately.

For example, a contract for the construction of three separate structures on the same site, each with its own set of specifications, is negotiated separately with the contractor.

Revenue from a Contract

To the extent that it is likely to generate income and is measurable, contract revenue includes the following:

• The contract’s agreed-upon initial income amount;
• Claims and incentives based on contract work changes;

Contractual Costs

The following items are included in the cost of a contract:

• Costs that are directly tied to the specific contract
• Costs that are attributed and assigned to contract activities in general
• Any other charges that are specifically charged to the client under the contract’s conditions.

Revenue and Cost Recognition from a Contract

When the result or outcome of a construction contract may be forecasted, the relevant contract revenue and contract costs must be recognized based on the contract’s current level of completion. Expected losses must be recorded as expenses right away.

I. In the case of a fixed-price contract, the outcome can be reliably estimated if all of the following conditions are met:

1. The whole revenue from a contract can be accurately calculated.

2. It is obvious that the financial benefits of such a contract will accrue to the company.

3. Both contract expenses and contract completion status can be calculated.

4. Contract expenses can be readily defined for a cost comparison with previous estimates

II. When all of the following conditions are met in the case of a cost-plus contract, the outcome can be reliably estimated:

1. The contract’s financial gains are likely to accrue to the organization.

2. The contract costs that are related to the contract can be readily identified and measured.

III. Percentage of completion method – This technique specifies how income and costs are recognized based on the contract’s stage of completion. Revenue and cost are recognized in the profit and loss statement in the accounting periods in which the job is completed using this technique.

IV. Contract work-in-progress costs — A contractor may incur costs related to future contract activity. If it is likely that such costs will be recovered, they are recorded as an asset.

Determination of the completion stage

A contract’s state of completion can be determined in a variety of ways. The following approaches may be used, depending on the nature of the contract:

• The proportion of contract costs incurred compared to the total projected contract costs; (for example, if the total contract cost is Rs. 30 lakhs and the costs incurred to date are Rs. 15 lakhs, the stage of completion is considered 50% complete, or 15 lakhs / 30 lakhs).
• Work-in-progress surveys; for example: in a contract for construction of a bridge, the site inspector can do a survey and with regards to the technicalities of the project, inform how much work has been completed
• Physical completion of contract work for example, in a contract for the construction of a five-story structure, if three stories are completed, the stage of completion is 6%, or 3 stories/5 stories.
• When the outcome of a construction contract cannot be predicted, income and cost should only be recognized to the extent that contract costs incurred are likely to be recovered.

Expected Losses are Recognized

When overall contract costs are likely to exceed total revenue from a contract, the expected losses should be reported as expenses as soon as possible. Regardless of the following, the number of such losses must be determined:

• The work has commenced on the contract or not
• The completion stage
• The estimated number of earnings from other contracts, which are subdivided as previously mentioned.

Disclosures required in financial statements:

1. An organization should make the following disclosures:

• Revenue from contracts recognized during the accounting period
• The methodologies for calculating contract revenue recognized during the period
• The procedures for determining the state of fulfillment of ongoing contracts.

2. At the reporting date, the following disclosures on contracts in progress must also be made:

• The total amount of money spent and the amount of money made.
• The number of advances received
• The amount of retained earnings

An organization should exhibit the following:

• As an asset, the gross amount payable from consumers for contract work;
• As a liability, the gross sum is payable to customers for contract work.

Differences between Indian Accounting Standards (IAS) 11 and AS 7

Also Read,

Accounting Methods

Changes in Indian Accounting Standard for NBFCs

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What types of leases are excluded from this standard?

The following items are not covered by this Standard:

(a) Leases for the exploration or use of natural resources. for example Oil, gas, wood, metals, and other mineral rights

(a) Licensing agreements for  example:  Films, video recordings, plays, writings, patents, and copyrights are examples.

c) Leases for the use of land

There are two types of leases:

1. Finance a lease

2. Operating Lease

Finance Lease

All risks and rewards are transferred to the asset owner in a lease. The title may or may not be transmitted in the future.

The following are some examples of finance leases:

1. A lease in which the lessee receives the assets at the conclusion of the lease period.
2. Lease term during which the lessee has the option to purchase the assets from the lessor at a price that is less than fair value on the date the option is exercised.
3. Even if the title is not transferred, the lease term covers the asset’s whole economic life.
4. A lease period in which the present value of the minimum lease payments equals or significantly covers the leased asset’s fair value.
5. The leased asset is of a unique kind. Ex-ambulance driver (the lessee can use it without major modifications being made)

Operating Lease

An Operating Lease is any type of lease that is not a finance lease.

In the case of a finance lease, accounting in the books of the lessee is required.

1. At the start of the lease, the lessee will record the lease as an asset or a liability equal to the fair value of the leased assets.
2. Divide lease payments between finance charges and the reduction of the outstanding amount.
3. Distribute the loan fee throughout the lease duration.
4. Make a depreciation journal entry.

Disclosure in the case of a finance lease

1. Leased assets should be reported separately.
2. At the balance sheet date, show the net carrying amount for each leased asset.
3. Provide a reconciliation between the balance sheet date’s Minimum Lease Payment and their current value.
4. Show the total of minimum lease payments and their current value at the balance sheet date for:

• One year is the deadline.
• After a year, but not more than five years
• More than five years later

5. At the balance sheet date, the minimum sublease payment is scheduled to be received.
6. A description of the lessee’s major lease arrangements in general

In the case of an Operating Lease, the payment is recorded as an expense in the profit and loss account in the Lessee’s books.

• In the case of an Operating Lease, the following information is provided:

1. Future lease payments for the next period

• One year is the deadline.
• After a year, but not more than five years
• More than five years later

2. Total Lease Payments Expected in the Future

3. Lease payment is shown in the period’s profit and loss statement

4. Lessee Significant Leasing Arrangements: A General Description

In the case of a finance lease, accounting in the Lessor’s accounts is required.

1. The lessor must record assets in his or her records in an amount equivalent to the net investment in the lease.
2. Keep track of financial revenue using a pattern that reflects a consistent periodic rate of return.
3. Calculate the lessor gross investment in leasing by estimating the unguaranteed residual value.
4. If the expected unguaranteed residual value decreases, modify the income allocation for the remainder of the lease term. Reduction in the amount to be recognized immediately in comparison to the amount already recognized. The upward adjustment will be overlooked.
5. The initial direct cost of the lease might be reflected in the profit and loss account right once or spread out over the lease term.

Disclosure  required in the case of a finance lease

1. Reconcile the total lease investment at the balance sheet date with the present value of the minimum lease payment. Also, reveal the same as

• One year is the deadline.
• After a year, but not more than five years
• More than five years later

2. Finance income that was not earned

3. Residual value that isn’t guaranteed

4. Provision for uncollectible minimum lease payments receivable has accumulated.

5. In the profit and loss account, a contingent rent is recorded.

6. A general description of the tenancy agreement

7. The initial direct cost accounting policy was adopted.

In the case of an Operating Lease, accounting in the Lessor’s books is required.

1. Assets should be recorded in the balance sheet under fixed assets by the lessor.
2. Lease income should be recorded in the profit and loss account.
3. Costs incurred, including depreciation, must be recorded in the income statement.
4. Examine for impairment and account for it in the books in accordance with GAAP.

In the case of an Operating Lease, disclosure is required.

1. At the balance sheet date, accumulated depreciation, accumulated impairment, and carrying amount for each asset class.
2. Depreciation is accounted for in the profit and loss account.
3. Impairment losses are accounted for in the profit and loss account.
4. In the profit and loss account, the impairment loss has been reversed.
5. For each of the following periods, the future minimum lease payment is:

• One year is the deadline.
• After a year, but not more than five years
• More than five years later

6. The whole contingency is recorded in the profit and loss account.

7. A general description of the tenancy agreement

Transaction of Sale and Leaseback

1. If the sale and leaseback transaction results in a financing lease, any excess or shortfall over the carrying amount should be delayed and amortized throughout the lease period in proportion to the leased assets’ depreciation.
2. If a sale and leaseback transaction results in an operating lease, any surplus or deficit over the carrying value should be reported in the book of account as soon as possible:
3.  If the sale price is less than fair value, the loss is offset by future lease payments at a lower price; it should be deferred and amortized in proportion to the lease payments over the estimated life of the asset.

AS19 vs. IAS17: What’s the Difference?

The following are the differences between IAS 17 and IFRS 16:

If payment to the lessor is not made on a straight-line basis, IAS 17 requires all lease rentals to be charged to the statement of profit and loss account on a straight-line basis unless another systematic approach is more appropriate.

IFRS 16: Unless the payments to the lessor are structured to increase in step with expected general inflation to compensate for the lessor’s expected inflationary cost associated with the lease, all lease rentals shall be charged to the statement of profit and loss as per the lease agreement.

This requirement is not met if payments to the lessor vary due to factors other than ordinary inflation.

Conclusion:

If there is an inflation component in the lease rentals, we must compute all expected rentals and charge them equally in the statement of profit and loss over the lease term, and we must transfer the excess/deficit to the lease equalisation account under IAS17.

Related Posts:

Ind AS 115: Revenue From Contracts With Customers

Accounting Methods

Concept of Accounting standards- A Study

Changes in Indian Accounting Standard for NBFCs

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