Overview of Ind AS-116
♠ The Ministry of Corporate Affairs (MCA) notified Ind AS 116, the new leases accounting standard on 30th March 2019 with the effective date of its application from 1st April 2019. Ind AS -116 replaces the current guidance in Ind AS-17, ‘Leases’.
♠ Ind AS 116 defines a lease as a contract, or part of a contract , that conveys the right to use an asset (the underlying asset) for a period of time in exchange for consideration.
♠ Under Ind AS 116 lessees have to recognize a lease liability reflecting future lease payments and a ‘right-of-use asset’ for almost all lease contracts. This is a significant change compared to Ind AS 17, under which lessees were required to make a distinction between a finance lease (on balance sheet) and an operating lease (off balance sheet). Ind AS 116 gives lessees optional exemptions for certain short-term leases and leases of low-value assets.
♠ The accounting by lessors will not significantly change. As under Ind AS 17, the lessor will continue to classify leases as either finance or operating, depending on whether substantially all of the risks and rewards incidental to ownership of the underlying asset have been transferred.
♠ Ind AS 116 adds significant new, enhanced disclosure requirements for both lessors and lessees.
♠ On transition, lessees can choose between full retrospective application or a simplified approach that includes certain reliefs and does not require a restatement of comparatives. In addition, as a practical expedient entities are not required to reassess whether a contract is, or contains, a lease at the date of initial application (that is, such contracts are ‘grandfathered’).
|S.No.||Ind AS 116||Existing Ind AS 17|
|1.||Ind AS 116 introduces a single lessee accounting model and requires a lessee to recognize 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 recognize 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 to classify leases as finance lease and operating lease.|
|2.||Under Ind AS 116, a lessee measures right-of-use assets similarly to other non-financial assets (such as property, plant and equipment) and lease liabilities similarly to other financial liabilities. As a consequence, a lessee recognizes depreciation of the right-of-use asset and interest on the lease liability, and also classifies cash repayments of the lease liability into a principal portion and an interest portion and presents them in the statement of cash flows applying Ind AS 7, Statement of Cash Flows.||Under Ind AS 17, for operating leases, lessee is required to recognize the lease payments as an expense on a straight- line basis unless another systematic basis is representative of the time pattern of the user’s benefit.|
|3.||Ind AS 116 requires detailed disclosure for lessees as compared to Ind AS 17.||Ind AS 17 requires less disclosure for
|4.||Requirements with regard to lessor accounting are substantially similar to accounting requirements contained in Ind AS 17. Accordingly, a lessor will continue to classify its leases as operating leases or finance leases, and to account for those two types of leases differently.||No major change|
|5.||Ind AS 116 contains additional disclosure requirements for lessor as compared to Ind AS 17, 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.||Ind AS 17 requires less disclosure for Lessor.|
|6.||Ind AS 116 contains specific provision for lease
modification for lessor and lessee.
|Ind AS 17 does not specifically provide
how to account for lease modification.
1. Lease liability is initially recognised and measured at an amount equal to the present value of minimum lease payments during the lease term that are not yet
2. Right of use asset is recognised and measured at cost, consisting of initial measurement of lease liability plus any lease payments made to the lessor at or before the commencement date less any lease incentives received, initial estimate of the restoration costs and any initial direct costs incurred by the
3. The lease liability is measured in subsequent periods using the interest rate implicit in the lease, if that rate can be readily determined. If that rate cannot be readily determined , the lessee’s incremental borrowing cost.
4. The right-of-use asset is depreciated in accordance with the requirements in Ind AS 16, Property, Plant and equipment & Ind AS Intangible Assets.
5. Recognition and measurement exemption are available for low-value assets and short-term leases. Assets of low value include IT equipment or office furniture. No monetary threshold has been defined for low-value assets. Short-term leases are defined as leases with a lease term of 12 months or less.
6. If an entity chooses to apply any one of the exemptions, payments are recognised on a straight-line basis or another systematic basis that is more representative of the pattern of the lessee’s benefit.
Lessees were hitherto required to screen and distinguish each of the lease arrangement as either an operating (off balance sheet) or finance lease (on balance sheet). Ind AS 116 requires lessees to recognize a ‘right-of-use asset’ and a ‘lease liability’ for almost all of the leasing arrangements.
Ind AS 116 does not contain substantial changes to lessor accounting compared to Ind AS 17. The lessor still has to classify leases as either finance or operating, depending on the nature of leases.
Ind AS 116 requires enhanced quantitative and qualitative disclosures for both lessor and lessees.