Short Summary on Ind AS 116 – Leases

1. This standard lays down the principles for the followings in respect of leases:

-Recognition

-Measurement

-Presentation

-Disclosure

2. Scope

3. Entity should identify at the inception of a contract that the contract is or contains a lease with the help of below definition.

• Definition of leases –

I. Lease is a contract or part of a contract

II. That conveys the right to use of an asset (the underlying asset)

III. For a period of time

IV. In exchange for consideration.

After going through the definition, it can be concluded that if a contract conveys right to control the use of an identified asset for a period of time in exchange for a consideration.

• Identified asset – An asset may be identified asset if,

I. Explicitly specified in a contract,

II. Implicitly specified at the time the asset made available for use

III. Asset which does not exist and may come into existence in future is also an identified asset.

• Right to use –

I. A lessee has right to use an identified asset if the lessor does not have substantive right to substitute the asset throughout the period of use.

II. Right to control – Lessee entity shall assess whether it has right to obtain substantially all the economic benefits from use of the identified asset and shall have right to direct the use of the identified asset.

Protective right does not prevent from having right to control of the asset.

• Lease term is a non-cancellable period starts from commencement date and includes any rent free period, renewable period (reasonably certain to exercise), period covered by an option to terminate (reasonably certain not to exercise).

4. Calculation of Right to Use (ROU) – ROU is an asset that represents a lessee’s right to use an underlying asset for the lease term.

5. Computation of Lease Liability

6. Entries in books of accounts.