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Sri Lanka, unlike India or many other counties at comparable levels of development, has takenteh giant's step of giving effect to the International Accounting Standard no. 17 on Accounting for Leases. The Standard, adopted as SLAS-19, was made effective from 1.4.1987.

Since leasing was only 6 years old baby then, the introduction of the accounting standard was quite a big decision: but in retrospect, leasing companies only seem to have benefited with this, because if the Standard were to be introduced at the current levels of penetration, it might have been more difficult to digest the change.

The current scenario for accounting for leases or related activities in Sri Lanka is as follows:

• The Sri Lanka Accounting and Auditing Standards Act, 1995 makes accounting standards of the Institute mandatory for all leasing companies and finance companies.
• The Act requires Gazette notification of the accounting standards.
• All financial leases are to be capitalised by the lessee in accordance with SLAS-19.
• The other provisions of SLAS-19 are similar to IAS-17 (prior to revision).
• There is no distinction between lease and hire-purchase transactions: therefore, the standard applies to a hire-purchase transaction also.
• The lessor would recognise income and asset in a financial lease based on substance.

Institute of Chartered Accountants of Sri Lanka has also adopted the IAS-12 on Accounting for Taxes on Income as SLAS-14.

Significantly, this standard provides for treatment of a deferred tax liability in books. The effect of this standard on leases is briefly discussed below:

• The deferred tax accounting principle requires accounting for taxes on Tax effect method, that is, irrespective of when is a tax payable, its effect should be recognised in the year in which the relevant income has been recorded.
• Thus, provision for tax is made for all timing differences: that is, reversible differences between the reported income and taxable income.
• Leasing invariably results into deferment of taxes: this is surely the case with Sri Lanka with high depreciation rates.
• Therefore, the deferred tax accounting norms require leasing companies to compulsorily create provision for deferred tax liability.
• Presently, this accounting standard is seen more in breach than in compliance.

The Institute has also adopted an Accounting Standard no. SLAS-33 being Revenue Recognition and Disclosures in Financial Statements of Finance Companies (based on IAS-30).

The chief features of this standard are discussed below:

• The standard applies only to finance companies, that is, depository entities.
• A finance company shall not accrue income on non-performing assets.
• A finance company should disclose the maturity composition of its assets and liabilities.
• Significant concentrations of assets, liabilities and off-balance-sheet items should be disclosed.

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