Imagine you need a photocopier for your office. You can buy it, or you can take it on lease — pay monthly rent, use it, return it later. AS 19 tells accountants exactly how to record these lease arrangements in the books. The big question the standard answers is: did you effectively buy the asset, or did you just rent it? That answer changes everything about how you account for it.
AS 19 splits leases into two types. A Finance Lease is one that transfers substantially all the risks and rewards of ownership to the lessee — even if the legal title stays with the lessor. Think of it as a loan disguised as a rental. A Operating Lease is everything else — a genuine rental where the lessor keeps the real economic ownership. The key indicators of a finance lease are: (a) ownership transfers at the end, (b) there's a bargain purchase option (you can buy it cheap later), (c) the lease term covers the major part of the asset's economic life, or (d) the present value of Minimum Lease Payments (MLP) equals substantially all of the asset's fair value. Even one of these indicators can tip a lease into 'finance' territory — examiners love asking you to classify based on given facts.
For the lessee under a finance lease: recognise the asset AND a liability at the lower of fair value or PV of MLPs on Day 1. Each EMI you pay is split between finance charge (interest — goes to P&L) and principal repayment (reduces the liability). Depreciate the asset like any owned asset — over its useful life or lease term, whichever is shorter. For an operating lease, the treatment is beautifully simple: charge the entire lease rent to P&L on a straight-line basis over the lease term, even if payments are unequal. This is asked frequently as a 4-mark or 8-mark question in Paper 1.