IND AS were introduced in India from way back in 2015 with inherent objective of devising a better compliance model and structure for the big Indian conglomerates so that they can prepare their financial statements for true and fair representation.
However, there were and still are many flaws in this implemented scheme of IND AS which even goes against the principles of accounting which are the very foundation on which any Standard of Accounting is made. This article scrutinizes IND AS 116’s impact, focusing on its divergence from traditional norms and the resultant dual recognition issue.
IND AS 116: LEASES
IND AS 116 took a significant detour from the traditional accounting model as proposed by AS 19: Leases for the lessee in terms of accounting for leases.
Under this upgraded AS the lessee instead of accounting for the lease as Operating or Financial lease is instructed to account lease as:
1. a) short terms leases and;
b) Leases for which the underlying asset is of low value
or
2. lease other than lease recognized above, i.e. long-term leases
Now, it becomes important to know what would constitute the leases as in point 1, therefore its definition is here as under: –
A. Short term leases: – If any lease contract is made for 12 months or less than 12 months.
Under this lease the lessee is exempted from the application of IND AS 116 rules and can simply record lease payment on SLM Basis or apply another systematic basis if that basis is more representative of the pattern of the lessee’s benefit.
B. Low Value leases: – As per the provisions of IND AS 116 lessee can avail the exemption from applying IND AS 116 rules on accounting of low value lease. There is no clear explanation on these assets from the point of view of value of assets, however the following 2 conditions needs to be satisfied in order to classify a lease as a low value lease:
- It should not be highly dependent or highly inter related on/with other assets from the point of view of its use.
- Lessee can take benefit from low value asset on its own without merging it with other sources.
Now, when it comes to the recognition of leases by the lessor the IND AS follows the same definitions for the categorization of leases which were used under the AS 19, i.e. Operating and Financial lease.
The Problem:
IND AS 116 provides that the lessee should recognize ROU (Right of Use) Asset in case of long-term lease and the subsequent recognition of the ROU Asset is similar to a normal capital asset.
This accounting holds good under the case of finance lease where the lessor derecognizes the asset from his books of accounts and instead recognizes receivables in the form lease rental receivables at the inception of lease.
However, under an operating lease where the asset solely remains in the books of accounts of the lessor and lessor only recognizes lease rentals as income on the SLM basis.
This gives birth to the problem of “DUAL RECOGNITION”. For the same transaction both lessee and lessor records/have already recorded the same asset in the different books of accounts.
The lessor never derecognizes the asset in operating lease while lessee records the asset in case of long-term lease, this accounting rule as prescribed by the IND AS is completely flawed.
The given situation can be better understood with the following example:
A (lessor) gives an asset on operating lease to B (lessee) for 3 years and the asset is not a low value asset.
In this immediate case A will continue to hold the asset in his books of accounts while B will also recognize the same asset in his book of accounts under long term lease.
CONCLUSION:
The accounting treatment proposed by the IND AS 116 for this above transaction is clear detour from the accounting principles and should be corrected as soon as possible, so that the ambiguity and uncertainty regarding the treatment of this transaction could be resolved.
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