Whether the Arrangement is in Nature of Operating Lease or Finance Lease

A. Facts of the Case

• M/s ABC has been constituted as a statutory authority under the Airports Authority of India Act, 1994. It has been created by merging the erstwhile International Airports Authority of India and National Airports Authority of India
• M/s ABC is engaged in control and management of the Indian airspace, expansion and strengthening of operational areas, viz. runways, aprons, taxiways, etc.
• The Company prepared its annual accounts, and was audited by the Comptroller and Auditor General of India (C&AG).
• The Company acquired X-Ray Baggage Inspection Systems (XBIS) on a BOT (Build, Own & Transfer) for some airports. The Company treated the assets as operating leases since, as per the terms of the agreement, the ownership and risks and rewards of the baggage system continued with the supplier.

B. Issue

As to whether, the X-Ray Baggage Inspection Systems (XBIS) acquired on BOT (Build, Own and Transfer) model for 06 years at various airports in India should be treated as operating lease or finance lease by the company.

C. Opinion

The opinion in respect of the issues raised by the company:

The arrangement for X-Ray baggage inspection system (XBIS) machines satisfy the tests laid down in AS 19 and hence would need to be classified as ‘finance lease’ by M/s ABC, the lessee.

The Company would take over the asset at the end of lease period of six years, free of cost, as a result of which the lease transfers ownership of the asset to the lessee by the end of the lease term, which is one of the key criteria for classifying leases as finance leases.

The above opinion was affirmed by the ICAI-Expert Advisory Committee.

Hemant Joshi, Audit Associate, SW India