Considering the requirement of AS 19, “Lease”, which classify transaction into
- finance lease or
- operating lease.
In case of operating lease, lease payment should be recognised as an expense in the Statement of Profit and Loss on a straight-line basis over the lease term. Whereas in case of finance lease, all the substantial risks and rewards incidental to ownership are transferred thus, considering the indication as prescribed in AS 19, the lessee should recognise the lease as an asset and a liability. Such recognition should be at an amount equal to the fair value of the leased asset at the inception of the lease. The lease agreement has to be studied and nature of agreement will decide the treatment of the lease payments.