AS 19 Leases: A Practitioner Guide for FY 2026-27
AS 19 (Leases) is the notified Indian Accounting Standard that prescribes how lessees and lessors must account for finance and operating leases in their financial statements.
The Ministry of Corporate Affairs (MCA) notified AS 19 under the Companies (Accounting Standards) Rules, 2006. It has been effective for Level I and II enterprises since 1 April 2001. The standard was originally issued by the Institute of Chartered Accountants of India (ICAI) in 2001.
For FY 2026-27, AS 19 remains crucial for non-Ind AS companies. In equipment-heavy sectors such as manufacturing, it determines whether lease liabilities appear on balance sheet or remain off balance sheet. This distinction affects key ratios and borrowing capacity.
AS 19 at a Glance
AS 19 establishes how to classify leases as finance or operating based on risk and reward transfer. It sets out different accounting treatments for lessees and lessors. The standard primarily serves companies with significant leased assets, especially Level I and II enterprises preparing financial statements under Indian GAAP.
| Field | Value |
|---|---|
| Standard Number | AS 19 |
| Full Name | Leases |
| Issuing Body | ICAI (Accounting Standards Board) |
| Notified By | MCA, Companies (Accounting Standards) Rules, 2006 (reaffirmed in Companies (Accounting Standards) Rules, 2021) |
| Effective Date | 1 April 2001 for Level I and II enterprises |
| Supersedes | Issued by ICAI in 2001 |
| Equivalent Standard | AS 19 ↔ Ind AS 116 ↔ IFRS 16 |
| Applies To | Mandatory for Level I and II enterprises, recommended for Level III. Ind AS-applicable companies follow Ind AS 116 instead, which has fundamentally different lessee accounting. |
What is AS 19: Leases?
AS 19 defines the accounting treatment for leases by requiring entities to distinguish between finance leases, which transfer substantially all risks and rewards of ownership, and operating leases. The standard prescribes how both lessees and lessors must recognise leased assets, liabilities, income, or expenses in their books.
The ICAI introduced this standard in response to international developments and the need for comparability across Indian companies. It aligns with global best practices but retains certain features unique to Indian GAAP. Ind AS-applicable companies now follow Ind AS 116 which replaces this standard with a single right-of-use model.
Finance controllers, statutory auditors, articleship trainees preparing financial statements under Indian GAAP, and CFOs of non-Ind AS entities are the primary users of this standard.
Objective of AS 19
- Prescribe accounting policies and disclosures applicable to finance leases and operating leases.
- Distinguish finance leases (transfer substantially all risks and rewards of ownership) from operating leases.
- Establish symmetrical accounting between lessee and lessor depending on lease classification.
By ensuring consistent lease classification and transparent disclosure requirements, the objective of AS 19 supports true and fair presentation of financial statements as required by Section 129 of the Companies Act, 2013.
Who Must Apply AS 19?
Entities covered
AS 19 applies as follows:
| Entity Category | Applicability |
|---|---|
| Level I enterprise | Mandatory |
| Level II enterprise | Mandatory |
| Level III enterprise* | Recommended |
| Ind AS company | Not applicable, must apply Ind AS 116 |
*Level classification per ICAI Notification; see icai.org.
Scope exclusions
AS 19 does not apply to:
- Lease agreements to explore for or use natural resources.
- Licensing agreements for items such as motion picture films or manuscripts.
- Lease agreements for land that do not transfer substantially all risks and rewards (i.e., operating lease classification applies only to land).
When the standard does not apply
Agreements excluded above fall under other standards or regulatory frameworks:
- Natural resource exploration falls under sector-specific guidelines.
- Licensing arrangements are addressed by intellectual property standards.
- Land-only leases without risk-reward transfer remain outside finance lease accounting, operating lease treatment applies.
Key Definitions under AS 19
| Term | Definition |
|---|---|
| Lease | Agreement where lessor conveys right to use an asset to lessee for agreed period in return for payment. |
| Finance lease | Lease transferring substantially all risks and rewards incident to ownership; title may or may not pass. |
| Operating lease | Lease other than a finance lease. |
| Lease term | Non-cancellable period plus periods optional at lessee's discretion with reasonable certainty. |
| Minimum lease payments | Payments over lease term excluding contingent rent, service costs, taxes payable by lessor. |
| Implicit interest rate | Discount rate equating PV of minimum lease payments plus unguaranteed residual value to asset's fair value. |
Recognition and Measurement under AS 19
When to recognise
An entity classifies each lease at inception based on whether it transfers substantially all risks and rewards incidental to ownership from lessor to lessee (Para 8). If so classified as a finance lease, otherwise as an operating lease, the classification determines recognition policy throughout the term unless terms change significantly.
Five key indicators drive this assessment:
Ownership transfers at end of term.
Bargain purchase option exists.
Lease term covers major part of asset’s useful life.
Present value (PV) of minimum lease payments amounts to substantially all fair value (FV) of asset.
Asset is specialised so only lessee can use it without major modifications.
If any indicator applies individually or collectively at inception, classify as finance lease; otherwise as operating lease.
Initial measurement
Finance lease, Lessee:
Recognise leased asset and corresponding liability at lower of FV of leased asset or PV of minimum lease payments at inception date (Para 11). Discount future payments using implicit interest rate if practicable; otherwise use lessee’s incremental borrowing rate.
**PV = Σ [MLP_t / (1 + r)^t]**,
where MLP_t = minimum lease payment in year t; r = discount rate; t = year number.
Operating lease, Lessee:
Do not recognise asset or liability on balance sheet. Instead charge rentals as expense in statement of profit & loss on straight-line basis over lease term unless another systematic basis better reflects benefit pattern (Para 23).
Finance lease, Lessor:
Recognise net investment in the lease as receivable equal to PV of minimum lease payments plus unguaranteed residual value discounted at implicit rate.
Operating lease, Lessor:
Continue recognising asset; depreciate per normal policy; recognise rental income straight-line over term unless another basis better reflects usage pattern.
Subsequent measurement
Finance lease, Lessee:
Depreciate recognised leased asset over shorter of useful life or lease term if no reasonable certainty about ownership transfer at end (referencing depreciation policy per AS 10). Apportion each payment between reduction in outstanding liability and finance charge using effective interest method; charge finance cost to P&L.
Operating lease, Lessee:
Continue charging rentals straight-line over remaining term; adjust deferred rent liability/asset if actual cash flows differ from straight-line expense due to escalations.
Finance lease, Lessor:
Recognise finance income so as to produce a constant periodic rate of return on net investment outstanding (Para 30).
Operating lease, Lessor:
Depreciate asset per normal policy; continue recognising rental income straight-line unless another basis is more appropriate based on usage pattern.
Risk and Reward Test - Five Indicators of Finance Lease
AS 19’s core test rests on substance over form, whether risks/rewards pass from lessor to lessee at inception (Para 8). The five indicators are:
Ownership passes by end of term.
Lessee can buy asset at price below expected fair value (“bargain purchase”).
Lease covers major part (>75%) economic life, even if title does not pass.
PV of minimum payments covers substantially all (>90%) fair value.
Asset is so specialised only lessee can use it without significant modification.
These thresholds are indicative, not bright lines, requiring professional judgement based on facts/circumstances each time.
Once classified based on these criteria at inception date, subsequent changes require reassessment only if terms change fundamentally, not due merely to passage of time or expectation shifts.
Ind AS 116 departs fundamentally from this model by eliminating distinction between finance/operating leases for lessees, nearly all leases appear on balance sheet via right-of-use model instead.
Worked Examples on AS 19
Example 1: Finance lease - lessee accounting
Sundaram Manufacturing enters into a five-year non-cancellable agreement leasing a specialised CNC machine tailored exclusively for its operations:
- Lease term: five years vs machine’s useful life six years (~83%)
- No purchase option but present value (PV) of minimum payments Rs 8.50 crore versus fair value Rs 9 crore (~94%)
- Machine cannot be used by others without major modifications, all indicators point towards finance lease classification
#### Computation Table
| Item | Amount (Rs crore) | Basis |
|---|---|---|
| Fair value | 9 | Supplier invoice |
| PV MLP @6% | 8.50 | Discounted cash flows |
| Annual payment | 2 | Contractual |
| Depreciation per annum | 1.42 | Rs 8.50 / six years |
#### Journal Entries
Inception:
- Dr Leased Asset (PPE) Rs 8.50 crore
- Cr Lease Liability Rs 8.50 crore
Year 1 Payment:
- Dr Finance Charge Rs 0.51 crore
- Dr Lease Liability Rs 1.49 crore
- Cr Bank Rs 2 crore
Year 1 Depreciation:
- Dr Depreciation Rs 1.42 crore
- Cr Accumulated Depreciation Rs 1.42 crore
Example 2: Operating lease - lessee straight-line
Krishna Industries signs a six-year office space rental agreement:
- Annual rent starts at Rs 60 lakh with annual escalation @5%
- Total rentals across six years sum up to Rs 408.12 lakh
- Building’s useful life far exceeds six years; no purchase option; property can be re-let, operating lease classification applies
#### Computation Table
| Item | Amount (Rs lakh) | Basis |
|---|---|---|
| Yearly cash outflow | See below | Contractual |
| Total rentals | 408.12 | Sum across six years |
| Straight-line annual rent | 68.02 | Rs 408.12 / six |
Breakdown:
Yearly rents = Rs 60 + Rs 63 + Rs 66.15 + Rs 69.46 + Rs 72.93 + Rs 76.58 lakh = Rs 408.12 lakh total
Straight-line annual charge = Rs 68.02 lakh/year
#### Journal Entries
Year 1:
- Dr Rent Expense (P&L) Rs 68.02 lakh
- Cr Bank Rs 60 lakh
- Cr Deferred Rent Liability Rs 8.02 lakh
In subsequent years the deferred rent liability reverses gradually until fully unwound at end-of-term
Disclosure Requirements under AS 19
Schedule III to the Companies Act, 2013, and AS 19 require detailed lease disclosures to ensure transparency in financial reporting. Proper disclosure enables users of financial statements to assess the nature, timing, and amount of lease-related cash flows and commitments. Both lessees and lessors must present maturity analyses, contingent rent details, and significant terms for all material leases.
| Item | Requirement | Para Reference |
|---|---|---|
| Lessee finance lease | Carrying amount, reconciliation of minimum lease payments (MLP) and present value (PV) by maturity bucket, contingent rents, sub-lease income | Para 22 |
| Lessee operating lease | Total of MLP under non-cancellable operating leases by maturity, lease and sub-lease payments recognised | Para 25 |
| Lessor finance lease | Reconciliation between gross investment and PV of MLP receivable by maturity bucket; unguaranteed residual values; allowance for uncollectible MLP | Para 37 |
| Lessor operating lease | Total amount of MLP under non-cancellable operating leases by maturity; total contingent rents; description of significant lease arrangements | Para 46 |
| Description of significant leasing arrangements | By both lessees and lessors | Para 22(c), 25, 37, 46 |
Auditors must verify that all required disclosures under AS 19 are complete and accurate to support a true and fair view as required by SA 700.
Common Mistakes & Industry-Specific Considerations
Common errors auditors flag
- Classifying a lease as operating without proper substance analysis, especially for long-term equipment leases.
- Omitting straight-line rental recognition for operating leases with escalating payments.
- Failing to split land and building components in finance leases, land often remains operating.
- Using an incorrect discount rate for minimum lease payment calculations.
- Including contingent rents in minimum lease payments.
- Incomplete maturity-bucket disclosure for both finance and operating leases.
Industry application notes
Aviation:
Aircraft leases under AS 19 were often classified as operating leases, keeping liabilities off balance sheet. On transition to Ind AS 116, airlines must recognise right-of-use assets and corresponding liabilities. This has significantly changed reported leverage ratios in the sector.
Retail:
Retailers typically enter long-term store leases classified as operating under AS 19. Straight-line rent expense smooths profit or loss impact versus actual cash outflows. Deferred rent balances can become significant on the balance sheet when there are rental escalations.
Equipment-heavy industries:
Manufacturers frequently use finance leases for plant machinery. Under AS 19, these create both an asset and liability on the balance sheet. Sale-and-leaseback transactions require careful assessment to avoid misclassification.
AS 19 vs Ind AS 116 vs IFRS: Key Differences
The accounting treatment for leases differs fundamentally between AS 19 (Indian GAAP), Ind AS 116 (Indian converged with IFRS), and IFRS 16. The most significant change is the elimination of off-balance-sheet accounting for lessees under Ind AS 116/IFRS 16.
| Aspect | AS | Ind AS | IFRS |
|---|---|---|---|
| Lessee model | Two models - finance and operating | Single model - right-of-use asset for nearly all leases | Same as Ind AS |
| Operating lease - lessee | Off balance sheet; straight-line rent | On balance sheet; ROU asset + lease liability | Same |
| Finance lease - lessee | On balance sheet at lower of FV/PV MLP | ROU asset and liability at PV of payments | Same |
| Lessor model | Finance and operating - similar to AS 19 | Lessor model substantially unchanged from AS 19 | Same |
| Short-term/low-value exemption | No specific exemption | Recognition exemption available | Same |
India’s adoption of Ind AS 116 aligns closely with IFRS 16 but retains some regulatory carve-outs (such as detailed transition options). For companies still reporting under Indian GAAP (AS 19), off-balance-sheet treatment persists for many lessee arrangements, a key difference from global practice.
Latest Amendments to AS 19 (FY 2026-27)
No amendments have been notified to AS 19 for FY 2026-27 as of 2026-05-02. The standard continues to apply in its existing form.
Related Standards You Should Know
- [Ind AS 116](/ind-as-116-leases/), Replaces AS 19 for Ind AS-applicable companies; single lessee model.
- [AS 10](/as-10-property-plant-and-equipment/), Owner's accounting for leased asset under finance lease (depreciation policies aligned).
- [AS 16](/as-16-borrowing-costs/), Borrowing costs analogy for finance lease interest allocation.
- [AS 26](/as-26-intangible-assets/), Software licences sometimes structured as leases, boundary with intangibles.
- [AS 28](/as-28-impairment-of-assets/), Impairment of leased assets under finance lease.
Need Help with AS 19 Compliance?
Patron Accounting LLP advises Indian companies on all aspects of AS 19 Leases compliance, from technical classification reviews to audit support. Our team supports CFOs, controllers, and statutory auditors across industries with:
- Statutory Audit
- Financial Reporting & Schedule III
- Disclosure Review
- Ind AS Advisory
Schedule a 30-minute consultation with our Ind AS team, Pune · Mumbai · Delhi · Gurugram.
Frequently Asked Questions (FAQs)
All Level I and Level II enterprises preparing financial statements under Indian GAAP must apply AS 19 Leases. Level III enterprises are recommended but not mandated. Companies that have adopted Ind AS should follow Ind AS 116 Leases instead of this standard.
Under AS 19, a finance lease transfers substantially all risks and rewards incidental to ownership to the lessee. If not, it is an operating lease. Five indicators, ownership transfer, bargain purchase option, major part of useful life covered, PV of payments covers FV, or specialised asset, guide this classification.
The main difference is that Ind AS 116 requires almost all lessee leases on balance sheet as right-of-use assets with corresponding liabilities. In contrast, under AS 19 many operating leases remain off balance sheet with straight-line rent expense recognition by lessees.
The five indicators are: ownership transfers at end; bargain purchase option exists; lease covers major part (>75%) economic life; present value of minimum payments covers substantially all (>90%) fair value; or asset is so specialised only the lessee can use it without major modification.
Under AS 19, escalating rentals in an operating lease must be recognised as expense on a straight-line basis over the entire term unless another systematic basis better reflects usage benefits. This may create deferred rent liabilities or assets on the balance sheet during interim periods.
At inception, the lessee recognises an asset and liability at the lower of fair value or present value of minimum lease payments. The entry is: Dr Leased Asset / Cr Lease Liability. Subsequent payments split between interest expense (finance charge) and principal reduction.
A lessor records net investment in the finance lease as receivable at inception equal to present value of minimum payments plus unguaranteed residual value. Finance income is recognised using a constant periodic rate of return over the term based on outstanding net investment.
Land is usually classified as an operating lease unless title passes or risks/rewards transfer fully. Buildings may qualify as finance or operating depending on risk/reward analysis. Separate each component if practical since land typically has indefinite life while buildings depreciate over time.
Yes. Both lessees (finance or operating) and lessors must disclose minimum future payments receivable or payable split into maturity buckets such as not later than one year, later than one year but not later than five years, and later than five years per relevant paragraphs.
No such exemptions exist in AS 19. All qualifying leases must be analysed according to standard’s requirements regardless of term length or underlying asset value unless specifically excluded from scope per paragraph guidance.
About This Article
Reviewed by CA & CS Team · Patron Accounting LLP
Technical reviewer: CA Sundram Gupta, FCA
Last reviewed: 2026-05-02
Sources: ICAI Compendium of Accounting Standards · MCA Notification (Companies (Accounting Standards) Rules, 2006 (reaffirmed in Companies (Accounting Standards) Rules, 2021)) · IFRS Foundation