CA DEEPAK RATHORE

CA Deepak RathoreThe new standard will require lessees to recognize most leases on their balance sheets. Lessees will use a single accounting model for all leases, with limited exemptions. Ind AS 116 is likely to be effective for accounting periods beginning on or after 1 April 2019.

Ind AS 116 (corresponding to IFRS 16) is under consideration of the National Advisory Committee on Accounting Standards (NACAS). Ind AS 116 is likely to be effective for accounting periods beginning on or after from 1 April 2019. However, the option of early application of Ind AS 116 from 1 April 2018 is proposed.

Ind AS 116 introduces a single lessee accounting model and requires a lessee to recognise assets and liabilities for all leases with a term of more than 12 months, unless the underlying asset is of low value. A lessee is required to recognise a right-of-use asset representing its right to use the underlying leased asset and a lease liability representing its obligation to make lease payments. Ind AS 17 required classifying leases as finance lease and operating lease

IFRS 16 primarily impacts operating leases in the books of lessee. It has minimal impact on the lessor accounting. Essentially in an operating lease arrangement, the lease would now be required to record the lease on the balance sheet as a ROU asset with the corresponding lease liability. Consequently, the erstwhile lease expense would be bifurcated as an amortisation of the ROU asset and interest expense on the liability. This is a significant change and has a direct positive bearing on the operating profits of the companies.

As per Para 22 of “Exposure Draft Indian Accounting Standard (Ind AS) 116” At the commencement date, a lessee shall recognise a right-of-use asset and a lease liability. The objective of the disclosures is for lessees to disclose information in the notes that, together with the information provided in the balance sheet, statement of profit and loss and statement of cash flows, gives a basis for users of financial statements to assess the effect that leases have on the financial position, financial performance and cash flows of the lessee.

Let us understand with the help of example:

Lease commencement date 1 January 2001. Lease payment INR 50 Crore per   Year at the end . Lease escalation 20 per cent after every three years. Lease term 10 years. Interest rate assumed at 10% PA.
 Rs in Crores
YEAR (200X) LEASE Discounting
Factor
Present Value of
Lease Payment
1 50 0.91 45.45
2 50 0.83 41.32
3 50 0.75 37.57
4 60 0.68 40.98
5 60 0.62 37.26
6 60 0.56 33.87
7 72 0.51 36.95
8 72 0.47 33.59
9 72 0.42 30.54
10 86.4 0.39 33.31
Total  632.40  370.83

Recognition of lease liability/ROU
YEAR ROU Interest Payment Net Balance
1 370.83 37.08 50 357.91
2 357.91 35.79 50 343.70
3 343.70 34.37 50 328.07
4 328.07 32.81 60 300.88
5 300.88 30.09 60 270.97
6 270.97 27.10 60 238.07
7 238.07 23.81 72 189.87
8 189.87 18.99 72 136.86
9 136.86 13.69 72 78.55
10 78.55 7.85 86.4 (0.00)

Particulars Impact as per
IND AS 17
Impact as per IND AS
116 (Proposed)
Differ-ences  
Bal Sheet P &L Bal Sheet P &L Impact on Profit-ability  
Year NA Lease Expe-nses Right-of-Use Asset Amort-ization Interest
Exp.
Total Exp. Excess Expenses /
(Short)
 
0 370.83
1 N/A 63.24 333.75 37.08 37.08 74.17 10.93 Expense increased

Profit Decreased

2 N/A 63.24 296.66 37.08 35.79 72.87 9.63
3 N/A 63.24 259.58 37.08 34.37 71.45 8.21
 4 N/A 63.24 222.50 37.08 32.81 69.89 6.65
5 N/A 63.24 185.41 37.08 30.09 67.17 3.93
6 N/A 63.24 148.33 37.08 27.10 64.18 0.94
7 N/A 63.24 111.25 37.08 23.81 60.89 (2.35) Expense decreased

Profit Increased

8 N/A 63.24 74.17 37.08 18.99 56.07 (7.17)
9 N/A 63.24 37.08 37.08 13.69 50.77 (12.47)
10 N/A 63.24 (0.00) 37.08 7.85 44.94 (18.30)
Total 632.40 261.57 632.40 (0.00)  

As per Para 26 -At the commencement date, a lessee shall measure the lease liability at the present value of the lease payments that are not paid at that date. The lease payments shall be discounted using the interest rate implicit in the lease, if that rate can be readily determined. If that rate cannot be readily determined, the lessee shall use the lessee’s incremental borrowing rate.

In the Year 1, Expenses under IND AS 116 is more by 10.93 Crore and correspondingly we have to recognize asset in our books as “Right of use asset” at Year Beginning for Rs.370.83 Crores and same is amortize during 10 Years and corresponding impact will be of recognize Lease liability of RS 370.83 as other Liability. However Expense under IND AS 116 will create time gap only as shown in above table.

The main impact of IFRS 16 will be to bring assets held under operating leases and the lease liabilities onto balance sheets and including the information on operating leases on the balance sheet and statement of profit and loss would mean that this information would be easily available to all investors to enable accurate estimation of a company’s liabilities.

DISCLOSURE 

A lessee shall either present in the balance sheet, or disclose in the notes:

(a) right-of-use assets separately from other assets.

(b) lease liabilities separately from other liabilities.

In the statement of cash flows, a lessee shall classify:

(a) cash payments for the principal portion of the lease liability within financing activities;

(b) cash payments for the interest portion of the lease liability within financing activities applying the requirements in Ind AS 7, Statement of Cash Flows, for interest paid; and

A lessee shall disclose additional qualitative and quantitative information in a tabular format, unless another format is more appropriate about its leasing activities necessary to meet the disclosure objective This additional information may include, but is not limited to, information that helps users of financial statements to assess:

(a) the nature of the lessee’s leasing activities;
(b) future cash outflows to which the lessee is potentially exposed that are not reflected in the measurement of lease liabilities. This includes exposure arising from:
(i) variable lease payments
(ii) extension options and termination options ;
(iii) residual value guarantees (as described in paragraph B51); and
(iv) leases not yet commenced to which the lessee is committed.
(iv) leases not yet commenced to which the lessee is committed.
(c) short-term lease payments, payments for leases of low-value assets and variable lease payments not included in the measurement of the lease liability within operating activities.
(d) sale and leaseback transaction.

Author can be reached at Deepakrathore.8888@gmail.com

Author Bio

More Under CA, CS, CMA

4 Comments

  1. CA Prachita says:

    Sir,
    I have question regarding sale & leaseback option. If a company wants to derecognise asset from its books and doesn’t want any further liability to remain in the books, what option does company remain with since under new INDAS all leases will have impact on balance sheet. Is there a way out???
    The prime motive of sales and LB transactions would fade away with the new std. Give your opinion.

    Thanks

  2. CA Amit soni says:

    In this example, some rectifications required.
    1. Lease payments are annually NOT monthly.
    2. Payments are made at end of the year NOT at commencement.
    3. Simple Interest rate assumed @10% pa.

Leave a Comment

Your email address will not be published. Required fields are marked *

Search Posts by Date

October 2020
M T W T F S S
 1234
567891011
12131415161718
19202122232425
262728293031