Analysis of Exposure Draft Ind AS 116

Introduction to Exposure Draft Ind AS 116

• Sets out principles for the recognition, measurement, presentation and disclosure of leases
• Objective to ensure that lessees and lessors provide relevant information in a manner that faithfully represents those transactions
• Proposed to be effective from 1^st April 2019
• Supersedes Ind AS 17

Major Changes

• Lessee Accounting
  • Introduces Single Lease Accounting Model
  • Requires Lessee to recognize assets and liabilities for all leases with a term more than 12 months except low value leases
  • Lessee is required to recognize a right to use the underlying leased asset and a lease liability representing its obligation to make lease payments
  • No separate classification of operating or finance lease ( Ind AS 17 requires such classification )
  • Measures right of use of assets similarly to other non financial assets ( e.g. PPE) and lease liabilities similarly to other financial liabilities
  • Lessee recognizes depreciation on lease asset and interest on lease liability and classifies repayments into principal and interest
  • Detailed disclosure in comparison to Ind AS 17

• Lessor Accounting
  • Requirements are substantially similar to accounting requirements under Ind AS 17
  • Lessor will continue to classify its leases as operating lease or finance lease
  • Requires additional disclosures such as disclosure of maturity analysis of lease payments, quantitative and qualitative explanation of significant changes in carrying amount of new investment in finance leases etc.

• Contains specific provision for lease modification for lessor and lessee
• Exclusions
  • Leases to explore for use minerals, oil, natural gas etc.
  • Leases of biological assets covered by Ind AS 41
  • Service concession arrangements within the scope of Ind AS 115
  • Licenses of intellectual property granted by lessor covered by Ind AS 115
  • Rights held by lessee as per Ind AS 38 as intangibles
• Exemptions available to Lessee
  • Not to apply recognition principles of this Ind AS to
    • Short term leases
    • Leases for which the underlying asset is of low value

Lease will be recognized as expense in both the above cases

• Lessee – Identifying a lease
  • A contract is, or contains, a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration.
  • An entity shall account for each lease component within the contract as a lease separately from non-lease components of the contract. Option available not to separate non-lease component as practical expadient
• Recognition
  • Lessee
    • At commencement recognize RTU asset at cost and corresponding lease liability
    • Cost of Lease shall comprise
      • Initial measurement of lease liability
      • Lease payments made before commencement of lease less lease incentives received
      • Initial direct costs incurred by lessee
      • Estimate of costs to be incurred by lessee in dismantling, removing , restoring site etc.
    • At commencement, lessee shall measure lease liability at present value of future lease payment discounted using interest rate implicit in lease if it can be readily determined. Otherwise lessee shall use incremental borrowing rate.
    • Subsequent measurement of RTU to be made using Cost model

• RTU shall be depreciated over the useful life of asset
• At commencement – measure lease liability at NPV model of lease payments over the tenure of lease

• Presentation
  • RTU assets and Lease liability in BS
  • Interest on lease and Depreciation on RTU in PL
  • SCF – Cash payments for principal portion of lease liability and interest payment as financing activity
• Disclosure
  • Lessee shall disclose qualitative and quantitative information of leases i.e. nature of lease, future cash flows in relation to leases, restrictions on leases, depreciation on RTU, Interest cost, lease modification costs, details of short term leases or low value assets

• Lessor – Classification of leases
  • A lessor shall classify each of its leases as either an operating lease or a finance lease.
  • Lease is classified as an operating lease if it does not transfer substantially all the risks and rewards incidental to ownership of an underlying asset.
  • Whether a lease is a finance lease or an operating lease depends on the substance of the transaction rather than the form of the contract based on following criteria
    • Transfer of ownership of the underlying asset to the lesse at the end of lease term
    • Option available to lessee to purchase underlying asset at substantially lower value, from the inception of lease
    • Major part of economic life of asset is covered in lease term
    • PV of future lease payments = Fair of Asset
    • Underlying asset is of specialized nature
• Finance Leases
  • Recognition and Measurement
    • At commencement – Recognise asset held under finance lease in BS and present it as receivable at an amount equal to the net investment in lease.
    • Interest rate implicit in the lease to measure the net investment in the lease
    • Subsequent measurement – recognise finance income over the lease term, based on a pattern reflecting a constant periodic rate of return on the lessor’s net investment in the lease.
  • Disclosure
    • Lessor shall disclose qualitative and quantitative explanation of significant changes in carrying amount of net investment in finance lease, maturity analysis of lease payment receivable, finance income etc.
• Operating Leases
  • Recognition and Measurement
    • Lease payments from operating leases as income on either a straight-line basis or another systematic basis if more appropriate
    • Recognise costs, including depreciation, incurred in earning the lease income as an expense.
  • Presentation
    • Present underlying assets subject to operating leases in its balance sheet according to the nature of the underlying asset.
  • Disclosure
    • For PPE apply disclosures as per Ind AS 116, maturity analysis of lease payments, finance income etc.
• Sale and Leaseback Transaction
  • If an entity (the seller-lessee) transfers an asset to another entity (the buyer- lessor) and leases that asset back from the buyer-lessor, both the seller-lessee and the buyer-lessor shall account for the transfer contract and the lease applying provisions of this standard
  • If transfer of an asset is sale – the seller-lessee shall recognise only the amount of any gain or loss that relates to the rights transferred to the buyer-lessor. The buyer-lessor shall account for the purchase of the asset applying applicable Standards, and for the lease applying the lessor accounting requirements in this Standard.
  • If the transfer of the asset is not a sale –
    • the seller-lessee shall continue to recognise the transferred asset and shall recognise a financial liability equal to the transfer proceeds. It shall account for the financial liability applying Ind AS 109
    • the buyer-lessor shall not recognise the transferred asset and shall recognise a financial asset equal to the transfer proceeds. It shall account for the financial asset applying Ind AS 109.