Ind AS 116 shall be applied for recognition, measurement, presentation and disclosure of leases. It provides guidance on accounting of leases by lessor and lessee separately. Principles of Ind AS 116 with respect to accounting of leases by lessor are substantially same as previously provided under Ind AS 17. However, there is significant change in the way a lessee shall account for leases in its books.

Under Ind AS 17, both, lessee and lessor, were required to classify a lease as operating or finance lease and account for it accordingly. But after introduction of Ind AS 116, only lessor is required to do this practice. A lessee shall treat almost all leases, except lease for short-term and leases of low value assets, as finance leases.

Leasing

An entity, being a lessee, shall recognize a right-of-use asset and a lease liability whenever it takes any asset on lease. The right-of-use of asset shall be measured at cost that comprises of initial value of lease liability, lease payments made on or before the commencement of lease, initial direct costs incurred by the entity and an initial estimated cost of dismantling & removing the leased asset and restoring the site on which the asset is located. The initial value of lease liability shall be determined at the present value of the lease payments due. The interest rate implicit in the lease or lessee’s incremental borrowing may be used to arrive at the present value of due lease payments.

At the date of each balance sheet, right-of-use asset should be measured either using cost model or revaluation model. Under cost model, the carrying amount of the asset is measured at initial cost less any accumulated depreciation or impairment. The amount of depreciation or impairment is debited to profit or loss. Under revaluation model, right-of-use asset shall be revalued at its fair value. Revaluation model shall be followed if the leased asset belongs to a class of property, plant and equipment for which the entity has adopted revaluation model in accordance with Ind AS 16, Property, Plant and Equipment. Any gain or loss arising on revaluation shall be recognized as per Ind AS 16.

The value of lease liability, at each balance sheet date, shall be increased by interest amount and decreased by the amount of lease payments made during the year. It shall further be adjusted for lease modifications, if any. The amount of interest is debited to profit or loss. Change in carrying amount of lease liability arising due to lease modifications shall be adjusted with carrying amount of related right-of-use asset where the asset is measured under cost model. Where the right-of-use asset is measured under revaluation model, change in lease liability due to lease modifications shall be directly recognized in statement of profit and loss.

Consequential amendments to other Ind ASs which contain provisions related to leases have also been notified and are effective from April 1, 2019. These include changes in Ind AS 101, First Time Adoption of Indian Accounting Standards; Ind AS 2, Inventories; Ind AS 12, Ind AS 16, Ind AS 21, The Effects of Changes in Foreign Exchange RatesInd AS 38, Intangible Assets, etc.

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