Short Summary on Ind AS 116 – Leases

By Ram Naresh CA, CS, CMA Articles February 21, 2022

1. This standard lays down the principles for the followings in respect of leases:

-Recognition

-Measurement

-Presentation

-Disclosure

2. Scope

This standard is applicable to all lease arrangements except –
Ind AS- 106	Ind AS- 41	Ind AS- 115	Ind AS-38
Lease to explore for or use minerals, oil, natural gas and similar non regenerative resources.	Leases of biological assets	Service concession arrangements, licenses of intellectual property.	Right held by a lessee under licensing agreements such items as motion picture films, video recordings, plays, manuscripts, patents and copyrights.

3. Entity should identify at the inception of a contract that the contract is or contains a lease with the help of below definition.

Definition of leases –

I. Lease is a contract or part of a contract

II. That conveys the right to use of an asset (the underlying asset)

III. For a period of time

IV. In exchange for consideration.

After going through the definition, it can be concluded that if a contract conveys right to control the use of an identified asset for a period of time in exchange for a consideration.

Identified asset – An asset may be identified asset if,

I. Explicitly specified in a contract,

II. Implicitly specified at the time the asset made available for use

III. Asset which does not exist and may come into existence in future is also an identified asset.

Right to use –

I. A lessee has right to use an identified asset if the lessor does not have substantive right to substitute the asset throughout the period of use.

A lessor’s substantive right to substitute an asset exists if –
Lessor has practical ability to substitute alternative assets throughout the period of use.	AND	Lessor would benefit economically from the exercise of its right to substitute the asset.

II. Right to control – Lessee entity shall assess whether it has right to obtain substantially all the economic benefits from use of the identified asset and shall have right to direct the use of the identified asset.

Protective right does not prevent from having right to control of the asset.

Lease term is a non-cancellable period starts from commencement date and includes any rent free period, renewable period (reasonably certain to exercise), period covered by an option to terminate (reasonably certain not to exercise).

4. Calculation of Right to Use (ROU) – ROU is an asset that represents a lessee’s right to use an underlying asset for the lease term.

PV of lease liability
Add: Directly attributable cost	XXX
Add: dismantling cost at PV	XXX
Less: Lease incentives	(XXX)
Add: Prepaid assets	XXX
Cost of ROU	XXX

5. Computation of Lease Liability

Computation of lease liability
Fixed Payment	XXX
Add: Variable	XXX
Add: Termination Penalty	(XXX)
Add: Exercise price	XXX
Add: Residual value Guarantee	XXX
Lease Liability	XXX

6. Entries in books of accounts.

In the books of lessor
Finance Lease				Operating Lease
1	Asset A/c	Dr.	XXX	1	Asset A/c	Dr.	XXX
	To Bank A/c	Cr.	XXX		To Bank A/c	Cr.	XXX

2	Receivable A/c	Dr.	XXX		Bank A/c	Dr.	XXX
	To Asset	Cr.	XXX		To Other Income	Cr.	XXX

In the books of lessee
Initial Recognition
Finance Lease				Operating Lease
1	ROU A/c	Dr.	XXX	1	ROU A/c	Dr.	XXX
	To Lease Liab (At PV)	Cr.	XXX		To Lease Liab (At PV)	Cr.	XXX

Subsequent Recognition

2	Depreciation A/c	Dr.	XXX	2	Depreciation A/c	Dr.	XXX
	To Accumulated Dep. A/c	Cr.	XXX		To Accumulated Dep. A/c	Cr.	XXX

3	To Accumulated Dep. A/c	Dr.	XXX	3	To Accumulated Dep. A/c	Dr.	XXX
	To ROU Asset A/c	Cr.	XXX		To ROU Asset A/c	Cr.	XXX

4	Interest Exp A/c	Dr.	XXX	4	Interest Exp A/c	Dr.	XXX
	To lease Liab A/c	Cr.	XXX		To lease Liab A/c	Cr.	XXX

5	Lease Liab A/c	Dr.	XXX	5	Lease Liab A/c	Dr.	XXX
	To Bank A/c	Cr.	XXX		To Bank A/c	Cr.	XXX