Indian Accounting Standard 116 – ‘Leases’

Brief overview

The Ministry of Corporate Affairs (MCA) notified Ind AS 116 – ‘Leases’ on March 30, 2019 to come into force on April 01, 2019. Ind AS 116 replaces the current guidance on lease accounting in Ind AS 17.

What is a Lease?

A lessee may elect not to apply Ind AS 116 for the following leases (This option is not available for lessor):

• Short term leases; and
• Leases for which underlying asset is of low value.

Significant Changes

• One of the major changes under Ind AS 116 is that lessee has to recognise a Right-of-Use as an asset to the class of property, plant and equipment to which it relates. For example, RTU of a Plant & Machinery shall be recognised under the same category. On the liability side, a Lease Liability should be recognised at present value of lease payments that are not paid at the commencement date of the lease.
• Subsequently in the statement of profit & loss, depreciation is to be charged on the right-of-use asset using straight line method over the useful life of the asset or lease term whichever is shorter and interest expenses to be recognised on the lease liability (unwinding of present value). The accounting for lessor under Ind AS 116 is substantially unchanged from Ind AS 17. The lessor is required to recognise lease as either Operating Lease or Finance Lease.
• Ind AS 116 requires new and augmented disclosures for both lessor and lessee.
• The lessee on transition to Ind AS 116 has an option to choose between full retrospective application or simplified approach which does not require to restate the amounts previously reported.

Recognition and Measurement in Books of Lessee

Initial Recognition (i.e. on the commencement date)

• Lease Liability: Lessee shall measure the lease liability at present value of the lease payments using discounting rate.
• Right-of-use asset: Lessee shall measure the asset at Cost.

Subsequent Recognition

• Lease Liability: The Lease Liability shall be reduced to reflect the lease payments made, also interest shall be calculated at IRR of the lease and charged to P&L.
• Right-of-use asset: Lessee shall follow the Cost Model for measuring the asset unless it applied revaluation model as per Ind AS 16, Property, Plant and Equipment (PPE), for all of the right-of-use assets that relate to that class of PPE.

Presentation in the Books of Lessee

Presentation in the Balance Sheet

• Lessee should either present in the balance sheet, or disclose in the notes:
• Right-of-use separately from other assets Lease liability separately from other liabilities

Presentation in the statement of profit or loss and other comprehensive income

• the interest expense on lease liability should be presented separately from the depreciation charge for the right-of-use asset;
• the interest expense on lease liability shall be presented as a part of finance cost

Recognition and Measurement in Books of Lessor

Ind AS 116 does not bring about any major change in accounting of lease by lessor. The lessor is required to classify each of its leases as either an operating lease or finance lease on the date of inception.

First time adoption of Ind AS 116

The following are the relaxations available in first time adoption of Ind AS:

• The deemed cost option which is available for property, plant and equipment is available for right­ of-use assets also.
• A first time adopter may assess whether a contract existing at the date of transition to Ind AS contains a lease by applying Ind AS 116 to those contacts on the basis of facts and circumstances existing at that date.

The Transition

Ind AS 116 brings about major changes in lease accounting for lessee whereas for lessor, apart from one specific exception in respect of sub-lease, no major adjustments are required on transition from Ind AS 17 to Ind AS 116. The complexity is more for lessee as there are number of key decisions to be taken.