Ind AS 116 Leases

Ind AS 116: Leases
CA PARAS JAIN
parasjain2807@gmail.com
1

Scope
 An entity shall apply this Standard to all leases, including leases of right-of-use assets in a
sublease, except for:
a) leases to explore for or use minerals, oil, natural gas and similar non-regenerative
resources,
b) leases of biological assets within the scope of Ind AS 41 – Agriculture, held by a
lessee,
c) service concession arrangements within the scope of Ind AS 115 - Revenue from
Contracts with Customers,
d) licences of intellectual property granted by a lessor within the scope of Ind AS 115 -
Revenue from Contracts with Customers, and
e) rights held by a lessee under licensing agreements within the scope of Ind AS 38 -
Intangible Assets, for such items as motion picture films, video recordings, plays,
manuscripts, patents and copyrights.
 Lease: A contract, or part of a contract, that conveys the right to control the use an
asset for a period of time in exchange for consideration.
 Sublease: A transaction for which an underlying asset is released by a lessee
(‘intermediate lessor’) to a third party, and the lease (‘head lease’) between the head
lessor and lessee remains in effect.
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 At inception of a contract, an entity shall assess whether the contract is, or contains, a
lease.
 A contract is, or contains, a lease if the contract conveys the right to control the use of an
identified asset for a period of time in exchange for consideration.
 To assess whether the contract conveys the right to control the use of an identified
asset, the customer has both of the following:
a) the right to obtain substantially all of the economic benefits from use of the
identified asset (a ‘benefit’ element), and
b) the right to direct the use of the identified asset (a ‘power’ element).
 A customer does not have the right to use an identified asset if the supplier has the
substantive right to substitute the asset throughout the period of use.
 A supplier’s right to substitute an asset is substantive only if both of the following
conditions exist:
a) the supplier has the practical ability to substitute alternative assets throughout
the period of use, and
b) the supplier would benefit economically from the exercise of its right to
substitute the asset.
Identifying a lease
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 Identified asset: An asset that is the subject of a lease must be specifically identified. This will be
case if either of the following applies:
a) An asset is explicitly specified in the contract (For eg. a specified serial number), or
b) An asset is implicitly specified in the contract (For eg. when there is only one asset that is
capable of being used to meet the contract terms).
 Right to obtain economic benefits from use: A customer can obtain economic benefits from use
of an asset directly or indirectly in many ways, such as by using, holding or sub-leasing the asset.
 Right to direct the use: A customer has the right to direct the use of an identified asset
throughout the period of use only if either:
a) the customer has the right to direct how and for what purpose the asset is used
throughout the period of use, or
b) the relevant decisions about how and for what purpose the asset is used are
predetermined and:
i. the customer has the right to operate the asset (or to direct others to operate the
asset in a manner that it determines) throughout the period of use, without the
supplier having the right to change those operating instructions, or
ii. the customer designed the asset (or specific aspects of the asset) in a way that
predetermines how and for what purpose the asset will be used throughout the
period of use.
Identifying a lease
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Flowchart for identifying a lease
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Is there an identified asset?
Does the customer have the right to obtain substantially all of the economic
benefits from use of the identified asset throughout the period of use?
Does the customer have the right to operate the asset throughout the
period of use, without the supplier having the right to change those
operating instructions?
Does the customer design the asset in a way that predetermines how and
for what purpose the asset will be used throughout the period of use?
The contract
contains a lease
The contract does
not contain a lease
Yes
Yes
No
Does the customer, the supplier or
neither party have the right to
direct how and for what purpose
the asset is used throughout the
period of use?
No
SupplierCustomer
Yes
Yes No
No
No asset,
no lease.
No control,
no lease
Neither; how and for what purpose the
asset will be used is predetermined

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Lease verses other contracts
Lease verses Sale contract
Lease verses Service contract
Lease contract:
Contract conveys the
right to control the
use of identified
asset for a period of
time.
Sale contract:
Contract transfers
the control of
identified asset.
Lease contract:
Customer controls
the use of an
identified asset for
a period of time.
Service contract:
Supplier controls
the use of asset
which is used to
deliver the service.

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Examples for identifying a lease
Example Identified asset?
Substantive
substitution rights?
Customer has a right to control
the use of the identified asset?
Lease?
Contract between
Customer and a freight
carrier (Supplier)
provides Customer with
the use of 10 rail cars of a
particular type for five
years.
Yes. Specific rails cars
identified in contract.
No. Can only be
substituted for repairs
or maintenance.
Yes. Customer has exclusive use of
rails cars during the contract
period so that it has the right to
substantially all of the economic
benefits from use of the rail cars.
Customer has the right to change
how and for what purpose the cars
are used
– it directs when and where the
cars are used, and which goods are
transported.
Supplier’s rights (restrictions on
specified types of cargo) are
protective only. Supplier’s control
of engines required to transport
the rail cars does not give it the
right to control the use of the cars.
Yes – lease of rail
cars (not engines).
Contract between
Customer and Supplier
requires Supplier to
transport a specified
quantity of goods by
using a specified type of
rail car in accordance
with a stated timetable
for five years.
No. Supplier has large
pool of similar items
and none are specified
in the contract.
Yes. Alternatives are
readily available at
minimal cost. Supplier
benefits economically
by using its pool of
available rolling stock
in the most efficient
manner.
No. Supplier selects which are
used for each delivery and obtains
substantially all of the economic
benefits from use of the rail cars.
No. Customer is
purchasing freight
capacity (service).

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Embedded lease: The term “embedded lease” is not defined in either Ind AS 116 or IFRS 16 or ASC
842, refers to a contract which contains elements of a lease contract i.e. identified assets controlled
by lessee but not explicitly specified as Lease Agreement.
Examples related to embedded lease contracts are:
 Manufacturing contract: A large retailer contracts with an entity to manufacture shoes for the
retailer. The contract is so large that the manufacturer has a specific facility that only
manufactures shoes for the retailer. The contract manufacturer arrangement contains an
embedded lease for the physical manufacturing space and equipment to produce the shoes.
 Advertising contract: A company enters into a contract to advertise on a billboard. Although this
contract could be written as an advertising service contract, the right to use the billboard may
meet the definition of an embedded lease.
 Transportation contract: A company enters into an arrangement to transport goods using a fleet
of rail cars. The transportation contract contains an embedded right to use the cars during the
period of the transportation contract.
 IT service contract: A hospital subject to Health Insurance Portability and Accountability
Act (HIPAA) regulations engages an information technology (IT) service provider to provide cloud-
computing services. To ensure patient privacy rights are not violated, the contract requires a
dedicated server be used to provide the services. The hospital decides when and how the
dedicated server is used based on its instructions to the IT service provider. The contract contains
an embedded lease of the dedicated server.
How to identify Embedded Leases within Contracts

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Lease term
 An entity shall determine the lease term as the non-cancellable period of a lease, together
with both:
i. periods covered by an option to extend the lease if the lessee is reasonably certain
to exercise that option, and
ii. periods covered by an option to terminate the lease if the lessee is reasonably
certain not to exercise that option.
Non-cancellable period of lease
Period covered by an option to extend
the lease
Period covered by an option to terminate
the lease
if lessee is reasonably certain
to exercise option
if lessee is reasonably certain
not to exercise option
 Non-cancellable period means the period during which the contract is enforceable.

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Lease term
Example:
An entity had taken a property on rent for official purpose for a period of 11 months from
01/06/2019 to 30/04/2020 and both the parties can terminate the agreement by giving
advance intimation of one month to the other party.
The agreement can be renewed further for a period of 11 months from 01/05/2020 to
31/03/2021 at both parties mutually agreeable terms with an increase in rent of 10%.
What is the lease term?
Non-cancellable period of
lease
Period covered by an
option to terminate the
lease
Period covered by an
option to extend the
lease
01/06/2019 30/06/2019 30/04/2020 31/03/2021
Lease term:
Non-cancellable period of lease = 1 month (From 01/06/2019 to 30/06/2019)
Plus: Period covered by an option to extend the lease if lessee is reasonably certain to exercise
option = 11 months (From 01/05/2020 to 31/03/2021)
Plus: Period covered by an option to terminate the lease if lessee is reasonably certain not to
exercise option = 10 months (From 01/07/2019 to 30/04/2020)
Hence, lease term = 22 months from 01/06/2019 to 31/03/2021.
01/07/2019 01/05/2020

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Lease term
 The lease term begins at the commencement date and includes any rent-free periods
provided to the lessee by the lessor.
 Commencement date: The date on which a lessor makes an underlying asset available
for use by a lessee.
 Factors considered when assessing reasonably certain criteria include:
a) contractual terms and conditions for the optional periods compared with market
rates,
b) significant leasehold improvements undertaken (or expected to be undertaken),
c) costs relating to the termination of the lease,
d) the importance of that underlying asset to the lessee’s operations,
e) conditionality associated with exercising the option.
 An entity shall revise the lease term if there is a change in:
a) non-cancellable period of the lease,
b) periods covered by an option to extend the lease if the lessee is reasonably certain to
exercise that option, and
c) periods covered by an option to terminate the lease if the lessee is reasonably
certain not to exercise that option.

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Recognition and Measurement by Lessee
Initial recognition and measurement
 At the commencement date, a lessee shall recognise a right-of-use asset and a lease
liability.
 At the commencement date, a lessee shall measure the right-of- use asset at cost.
 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.
Right-of-use asset Lease liability
• Lease liability
• Lease payments made at or
before the commencement date
• Initial direct costs
• Restoration costs
 Present value of lease payments
• Fixed payments
• Variable lease payments
• Residual value guarantees
• Exercise price of purchase option
• Termination penalty
 Cost

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Lease liability
 Payments included in the measurement of the lease liability are following:
a) fixed payments (including in-substance fixed payments), less lease incentives,
b) variable lease payments that depend on an index or a rate,
c) amounts expected to be payable by the lessee under residual value guarantees,
d) the exercise price of a purchase option if the lessee is reasonably certain to exercise
that option, and
e) payments of penalties for terminating the lease, if the lease term reflects the lessee
exercising an option to terminate the lease.
 Fixed payments: Payments made by a lessee to a lessor for the right to use an
underlying asset during the lease term, excluding variable lease payments.
 In-substance fixed lease payments: Payments that may, in form, contain variability
but that, in substance, are unavoidable. For example, payments that must be made
only if an asset is proven to be capable of operating during the lease, or only if an
event occurs that has no genuine possibility of not occurring.
 Lease incentives: Payments made by a lessor to a lessee associated with a lease, or
the reimbursement or assumption by a lessor of costs of a lessee.
 For example, up-front cash payment or reimbursement of relocation costs.

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Lease liability
 Variable lease payments: The portion of payments made by a lessee to a lessor for the
right to use an underlying asset during the lease term that varies because of changes in
facts or circumstances occurring after the commencement date, other than the passage of
time.
 Variable lease payments that depend on an index or a rate should initially be
measured using the index or rate as at the commencement date.
 Examples of variable lease payments that depend on an index or a rate are:
a) payments linked to a consumer price index,
b) payments linked to a benchmark interest rate (such as LIBOR),
c) payments that vary to reflect changes in market rental rates.
 Variable lease payments that do not depend on an index or a rate are excluded from
measurement of lease liabilities and are recognised in profit or loss in the period in
which incurred. For example, variable lease payments linked to future performance
or use of the underlying asset.
 Residual value guarantee: A guarantee made to a lessor by a party unrelated to the lessor
that the value (or part of the value) of an underlying asset at the end of a lease will be at
least a specified amount.

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 Example of variable lease payment that depend on a rate
Lessee enters into a lease for 5 years, with a single lease payment payable at the beginning of each year. The
initial lease payment is Rs.1,00,000. Lease payments will increase by the rate of LIBOR each year. At the date
of commencement of the lease, LIBOR is 2 per cent. Assume that the interest rate implicit in the lease is 5
per cent.
The lease payments should initially be measured using the rate (i.e. LIBOR) as at the commencement date.
LIBOR at that date is 2 per cent; therefore, in measuring the lease liability, it is assumed that each year the
payments will increase by 2 per cent, as follows:
Lease liability
Year Lease payment Discount factor
Present value of lease
payment
1 1,00,000 1.000 1,00,000
2 1,02,000 0.952 97,143
3 1,04,040 0.907 94,367
4 1,06,121 0.863 91,671
5 1,08,243 0.822 89,052
Total 4,72,233
Therefore, the lease liability is initially measured at Rs.4,72,233.

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Lease liability
 Discount rate: The lease payments shall be discounted using:
• the interest rate implicit in the lease, or
• if the interest rate implicit in the lease cannot be readily determined, the lessee’s
incremental borrowing rate.
 Interest rate implicit in the lease: The rate of interest that causes the present value of
a. lease payments and
b. unguaranteed residual value
to equal the sum of
i. fair value of the underlying asset and
ii. any initial direct costs of the lessor.
 Unguaranteed residual value: That portion of the residual value of the underlying
asset, the realisation of which by a lessor is not assured or guaranteed solely by a
party related to the lessor.
 Lessee’s incremental borrowing rate: The rate of interest that a lessee would have to
pay to borrow over a similar term, and with a similar security, the funds necessary to
obtain an asset of a similar value to the right-of-use asset in a similar economic
environment.

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 The cost of the right-of-use asset shall comprise:
a) the amount of the initial measurement of the lease liability,
b) any lease payments made at or before the commencement date, less any lease
incentives received,
c) any initial direct costs incurred by the lessee, and
d) an estimate of costs to be incurred by the lessee in dismantling and removing the
underlying asset, restoring the site on which it is located or restoring the underlying
asset to the condition required by the terms and conditions of the lease, unless those
costs are incurred to produce inventories.
Right-of-use asset
 Initial direct costs: Incremental costs of obtaining a lease that would have not been
incurred if lease had not been obtained, except for such costs incurred by a
manufacturer or dealer lessor in connection with a finance lease. For example,
brokerage.
 Restoration costs: The lessee incurs the obligation for restoration costs either at the
commencement date or as a consequence of having used the underlying asset during
a particular period. Such restoration costs are recognised as part of the right-of-use
asset and the estimated liability is recognised as provision. It is not included as part
of the lease liability.

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Subsequent measurement of the right-of-use asset
 After the commencement date, a lessee shall measure the right-of-use asset applying a
cost model, unless it applies the revaluation model.
Cost model Revaluation model
 Right-of-use asset is measured at cost:
a) less any accumulated depreciation and
any accumulated impairment losses,
and
b) adjusted for any remeasurement of the
lease liability.
 Depreciation: Apply Ind AS - 16 to
depreciate right-of-use asset.
 Impairment: Apply Ind AS - 36 to
determine whether the right-of-use
asset is impaired and to account for any
impairment loss identified.
 If right-of-use assets relate to a class of
property, plant and equipment to which
the lessee applies the revaluation model
in Ind AS 16, a lessee may elect (i.e.
option) to apply that revaluation model
to all of the right-of-use assets that
relate to that class of property, plant and
equipment.
 The election can be made on a class-by-
class basis.

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Subsequent measurement of the lease liability
 After the commencement date, a lessee shall measure the lease liability by:
a) increasing the carrying amount to reflect interest on the lease liability,
b) reducing the carrying amount to reflect the lease payments made, and
c) adjusted for any remeasurement of the lease liability or lease modifications.
 A lessee shall remeasure the lease liability if there is change in:
a) lease term, or
b) lease payments, or
c) discount rate.
 A lessee shall recognise the amount of the remeasurement of the lease liability as an
adjustment to the right-of-use asset. However, if the carrying amount of the right-of-use asset
is reduced to zero and there is a further reduction in the measurement of the lease liability, a
lessee shall recognise any remaining amount of the remeasurement in profit or loss.
 Lease modification: A change in the scope of the lease, or the consideration for the lease,
that was not part of the original terms and conditions of the lease.
• For example:
1. Adding or terminating the right to use one or more underlying assets.
2. Extending or shortening the contractual lease term.

 A lessee is exempt from lease recognition in the following cases:
a) short-term leases, and
b) leases for which the underlying asset is of low value.
 The lessee shall recognise the lease payments associated with above mentioned leases as an expense
over the lease term on either a straight-line basis or another systematic basis.
Recognition exemptions
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Short-term leases Leases of low value assets
 Short-term lease: A lease that, at the commencement date,
has a lease term of 12 months or less.
 A lease that contains a purchase option is not a short-term
lease.
 The election for short-term leases shall be made by class of
underlying asset to which the right of use relates.
 A class of underlying asset is a grouping of underlying
assets of a similar nature and use in an entity’s operations.
• Example - An entity entered into lease contract for several
items of office equipment – some for less than 12 months
and some for more than 12 months, with none containing
purchase options. Assuming that the items of office
equipment are all considered to be of the same class, if the
entity wishes to use the short term lease exemption it must
apply that exemption for all of the leases with terms of 12
months or less. The leases with terms more than 12 months
will be accounted in accordance with the general
recognition and measurement requirements for lessee.
 Low value asset: An underlying asset can be of low
value only if:
a) the lessee can benefit from use of the
underlying asset on its own or together with
other resources that are readily available to
the lessee, and
b) the underlying asset is not highly dependent
on, or highly interrelated with, other assets.
 A lessee shall assess the value of an underlying asset
based on the value of the asset when it is new. Value
amounting how much rupees is not specified.
• Examples of low-value assets are tablet, personal
computers, small items of office furniture, telephones,
etc.
 The election for leases of low value assets can be made
on a lease-by-lease basis.

Separating components of a contract – lease / non-lease
 An entity shall account for each lease component within the contract as a lease separately
from non-lease components of the contract, unless the entity applies the practical
expedient.
 As a practical expedient, a lessee may elect, by class of underlying asset, not to separate
non-lease components from lease components, and instead account for each lease
component and any associated non-lease components as a single lease component.
 The right to use an underlying asset is a separate lease component if both:
a) the lessee can benefit from use of the underlying asset either on its own or together
with other resources that are readily available to the lessee, and
b) the underlying asset is neither highly dependent on, nor highly interrelated with, the
other underlying assets in the contract. (Same as low value asset)
 Examples:
• A contract for lease of a car include its maintenance services.
• A single contract may include leases of land, buildings and equipment.
 A lessee shall account for non-lease components applying other applicable standards if
practical expedient is not applied.
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22
Transition
 As a practical expedient, an entity is not required to reassess whether a contract is, or
contains, a lease. Instead, the entity is permitted:
a) to apply this Standard to contracts that were previously identified as leases applying
Ind AS 17 Leases. The entity shall apply the transition requirements to these leases.
b) not to apply this Standard to contracts that were not previously identified as
containing a lease applying Ind AS 17.
 If an entity chooses to apply this practical expedient, it shall
• disclose that fact and
• apply the practical expedient to all of its contracts.
• As a result, the entity shall apply the requirements of this standard regarding the
identification of leases only to contracts entered into (or changed) on or after the date
of initial application.

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Transition
 A lessee shall apply this Standard to all of its existing leases either:
a) retrospectively to each prior reporting period presented applying Ind AS 8 Accounting
Policies, Changes in Accounting Estimates and Errors (i.e. full retrospective approach), or
b) retrospectively with the cumulative effect of initially applying the Standard recognised at
the date of initial application (i.e. modified retrospective approach or cumulative catch-up
approach).
 If a lessee elects to apply modified retrospective approach, the lessee shall:
a) recognise a lease liability which can be measured at the present value of the remaining
lease payments, discounted using the lessee’s incremental borrowing rate.
b) recognise a right-of-use asset which can be measured, on a lease-by-lease basis, at either:
i. its carrying amount as if the Standard had been applied since the commencement
date, but discounted using the lessee’s incremental borrowing rate, or
ii. an amount equal to the lease liability, adjusted by the amount of any prepaid or
accrued lease payments.
c) not restate comparative information. Instead, the lessee shall recognise the cumulative
effect of initially applying this Standard as an adjustment to the opening balance of
retained earnings.

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Full retrospective approach or modified retrospective approach?
An entity shall apply either of the option to its ALL leases.
Option 1 – Full retrospective
• Restate comparatives as
if Ind AS 116 always
applied
Option 2 – Modified retrospective
• Comparative amounts are not restated
• Any difference between asset and liability recognised
in opening retained earnings at the date of transition
• Carry forward existing finance lease liabilities
• Calculate outstanding liability for existing operating
leases using lessee’s incremental borrowing rate at
the date of transition
• Choose how to measure right-of-use asset on lease-
by-lease basis:
Option 2A –
Measure right-of-use
asset as if Ind AS 116
had been applied from
lease commencement
date but using lessee’s
incremental borrowing
rate at date of transition
Option 2B –
Measure right-of-use asset
at amount equal to lease
liability (adjusted for
accruals and prepayments)
Transition

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Transition
Option 1
The liability and asset are both calculated as if Ind AS 116 had always been applied, with comparative
amounts restated. The liability on the commencement date of the lease is calculated as the present value
of the future rentals, discounted using a rate of 8 per cent.
The impact on the balance sheet as at the date of transition is a reduction in net assets of Rs.19,598 (asset
of Rs.2,58,728 and liability of Rs.2,78,326), with an expense of Rs.2,80,402 recognised in the statement of
profit and loss post-transition.
Date Asset Liability Total expense
Lease commencement – 1 April 2017 4,31,213 4,31,213
Year ended 31 March 2018 3,44,970 3,57,710 1,12,740
Year ended 31 March 2019 2,58,728 2,78,326 1,06,859
Amounts recognised at transition on 1 April 2019 2,58,728 2,78,326
Year ended 31 March 2020 1,72,485 1,92,593 1,00,509
Year ended 31 March 2021 86,243 1,00,000 93,650
Year ended 31 March 2022 0 0 86,243
Total expense post-transition 2,80,402
Example:
• 5-year lease, entered into on 1 April 2017,
• Rs.1,00,000 payable on the beginning of each year,
• 8 per cent discount rate at lease commencement,
• 12 per cent incremental borrowing rate at date of transition, and
• straight-line depreciation of the right- of-use asset is appropriate.

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Transition
Option 2A
Comparative amounts are not restated and the liability is calculated as the present value of the three
outstanding rentals of Rs.1,00,000, discounted using the incremental borrowing rate at the date of transition
of 12 per cent.
The asset is calculated as if Ind AS 116 had always been applied, but using the incremental borrowing rate at
the date of transition of 12 per cent.
The impact on the balance sheet as at the date of transition is a reduction in net assets of Rs.26,764 (asset of
Rs.2,42,241 and liability of Rs.2,69,005), with an expense of Rs.2,73,236 recognised in the statement of profit
and loss post-transition.
Lease commencement – 1 April 2017 4,03,735
Year ended 31 March 2018 3,22,988
Year ended 31 March 2019 2,42,241
Amounts recognised at transition on 1 April
2019
2,42,241 2,69,005
Year ended 31 March 2020 1,61,494 1,89,286 1,01,028
Year ended 31 March 2021 80,747 1,00,000 91,461

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Transition
Option 2B
Comparative amounts are not restated and the liability is calculated as the present value of the
three outstanding rentals of Rs.1,00,000, discounted using the incremental borrowing rate at
the date of transition of 12 per cent. The asset is then set equal to the liability.
The net impact on the balance sheet as at the date of transition is nil (asset = liability) but the
expense post- transition is Rs.3,00,000.
Amounts recognised at transition on 1 April
2019
2,69,005 2,69,005
Year ended 31 March 2020 1,79,337 1,89,286 1,09,949
Year ended 31 March 2021 89,668 1,00,000 1,00,383
 Comparison of transition options
Options 1 and 2A both reduce net assets (retained earnings) on transition whereas Option 2B
leads to nil impact on net assets but, because the asset is set higher in Option 2B than under
other options, the expense post-transition is higher in Option 2B as compared to other
options.

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 Under modified retrospective approach, a lessee is permitted to apply the following
practical expedients on a lease-by-lease basis:
a) a lessee may apply a single discount rate to a portfolio of leases with reasonably
similar characteristics.
b) a lessee is not required to make any adjustments on transition for leases whose lease
term ends within 12 months from transition date (short-term leases).
c) a lessee may exclude initial direct costs from the measurement of the right-of-use
asset.
d) a lessee may use hindsight, such as in determining the lease term if the contract
contains options to extend or terminate the lease.
 Under modified retrospective approach, a lessee is not required to make any adjustments
on transition for leases of low value assets if recognition exemption is selected.
 Under modified retrospective approach, in case of finance lease, a lessee is required to
carry forward the same balances of lease assets and lease liabilities.
Transition

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Sr. No. Ind AS 17 Ind AS 116
1. Ind AS 17 defines lease as an agreement
whereby the lessor conveys to the
lessee in return for a payment or series
of payments the right to use an asset
for an agreed period of time.
Ind AS 116 defines lease as a contract, or
part of a contract, that conveys the right to
control the use of an underlying asset for a
period of time in exchange for
consideration.
2. Ind AS 17 required leases to be
classified as finance lease and
operating lease. It specifies separate
accounting model for lease classified as
operating lease and finance lease.
Ind AS 116 introduces a single lessee
accounting model and requires a lessee to
recognise a right-of-use asset and a lease
liability for all leases with a term of more
than 12 months, unless the underlying asset
is of low value.
3. Under Ind AS 17, lessee in case of
operating lease is required to recognise
the lease payments as expense either
on a straight-line basis or another
systematic basis.
Under Ind AS 116, a lessee measures right-
of-use asset and lease liability. As a
consequence, a lessee recognises
depreciation on the right-of-use asset and
interest on the lease liability.
4. Ind AS 17 does not specifically provide
for accounting of lease modification.
Ind AS 116 contains specific provision for
accounting of lease modification by lessee
and lessor.
Ind AS 17 vs Ind AS 116

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Company P (Lessee) enter into a lease arrangement for a period of 5 years with Company Q (Lessor) for
occupying lessor’s warehouse. The lease rental is Rs.1,50,000 per year. The interest rate implicit in the
lease is 5% per annum. It is assumed that there are no other terms in the lease arrangement.
The net present value of lease rentals of Rs.1,50,000 for a period of 5 years at 5% discount rate
amounts to Rs.6,49,422.
On the commencement date, Company P recognises a lease liability and right-of-use assets of
Rs.6,49,422 in its balance sheet. The below table summarises the treatment of above lease
arrangement under Ind AS 116 in Balance Sheet and Statement of Profit and Loss of lessee.
Example explaining accounting by Lessee
Lease Liability Right-of-use Asset
Period Opening
Balance
Lease
Payment
Interest
Expenses
Closing
Balance
Opening
Balance
Depreciation Closing
Balance
Column 1 2 3 (1*5%) 4 (1-2+3) 5 6 7 (5-6)
At Inception 6,49,422 - - 6,49,422 6,49,422 - 6,49,422
Year 1 6,49,422 (1,50,000) 32,471 5,31,893 6,49,422 (1,29,884) 5,19,538
Year 2 5,31,893 (1,50,000) 26,595 4,08,488 5,19,538 (1,29,884) 3,89,654
Year 3 4,08,488 (1,50,000) 20,424 2,78,912 3,89,654 (1,29,884) 2,59,770
Year 4 2,78,912 (1,50,000) 13,946 1,42,858 2,59,770 (1,29,884) 1,29,886
Year 5 1,42,858 (1,50,000) 7,142 - 1,29,886 (1,29,886) -
Total 7,50,000 100,578 649,422
Amount in Rs.

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Amount in Rs.
*(Positive figures and figures in the bracket indicate favorable and adverse impact respectively on
amount of net income/EBITDA under Ind AS 116 as compared to Ind AS 17).
As per above example, whereas under Ind AS 116, Company P recognises interest expenses on lease
liability and depreciation on right-of-use assets in the statement of profit and loss, it would recognise
the operating lease rental expenses under Ind AS 17 as a part of operating expenses. Accordingly, Ind
AS 116 is expected to have a favorable impact on EBITDA as compared to Ind AS 17.
Further, while in the initial years the total expenses comprising of depreciation and interest expense
under Ind AS 116 is expected to be higher as compared to lease rental expense under Ind AS 17, the
total expenses over the lease term under Ind AS 116 and Ind AS 17 will remain at the same level.
Impact analysis of Ind AS 116 as compared to Ind AS 17
As per Ind AS 116 Ind AS 17
Period Interest
Expense
Depreciation Total Expenses Lease rental
Expenses
Impact on Net
Income*
Impact on
EBITDA*
Column 1 2 3 (1+2) 4 5 (4-3) 6
Year 1 32,471 1,29,884 1,62,355 1,50,000 (12,355) 1,62,355
Year 2 26,595 1,29,884 1,56,479 1,50,000 (6,479) 1,56,479
Year 3 20,424 1,29,884 1,50,308 1,50,000 (308) 1,50,308
Year 4 13,946 1,29,884 1,43,830 1,50,000 6170 1,43,830
Year 5 7,142 1,29,886 1,37,028 1,50,000 12,972 1,37,028
Total 1,00,578 6,49,422 7,50,000 7,50,000 - 7,50,000

32
 A lessor shall classify each of its leases as either an operating lease or a finance lease.
 Finance lease: A lease is classified as a finance lease if it transfers substantially all the
risks and rewards incidental to ownership of an underlying asset.
 Operating lease: A lease is classified as an operating lease if it does not transfer
substantially all the risks and rewards incidental to ownership of an underlying asset.
o Risks include the possibilities of losses from idle capacity or technological obsolescence
and of variations in return because of changing economic conditions.
o Rewards may be represented by the expectation of profitable operation over the
underlying asset’s economic life and of gain from appreciation in value or realisation of a
residual value.
 Whether a lease is a finance lease or an operating lease depends on the substance of the
transaction rather than the form of the contract.
 Lease classification is made at the inception date and is reassessed only if there is a lease
modification.
Classification of leases by Lessor
 When the underlying asset will be returned by the lessee to lessor, it is an operating lease.
 When the underlying asset will be retained (not returned) by the lessee, it is a finance lease.

33
 Primary indicators of situations that individually or in combination would normally lead to a lease
being classified as a finance lease are:
a) the lease transfers ownership of the underlying asset to the lessee by the end of the lease
term,
b) the lessee has the option to purchase the underlying asset at a price that is expected to be
sufficiently lower than the fair value at the date the option becomes exercisable for it to be
reasonably certain, at the inception date, that the option will be exercised,
c) the lease term is for the major part of the economic life of the underlying asset even if
title is not transferred,
d) at the inception date, the present value of the lease payments amounts to at least
substantially all of the fair value of the underlying asset, and
e) the underlying asset is of such a specialised nature that only the lessee can use it without
major modifications.
 Additional indicators of situations that individually or in combination could also lead to a lease
being classified as a finance lease are:
a) if the lessee can cancel the lease, the lessor’s losses associated with the cancellation are
borne by the lessee,
b) gains or losses from the fluctuation in the fair value of the residual accrue to the lessee (for
example, in the form of a rent rebate equaling most of the sales proceeds at the end of the
lease), and
c) the lessee has the ability to continue the lease for a secondary period at a rent that is
substantially lower than market rent.
Classification of leases by Lessor

34
Finance leases - Recognition and measurement by Lessor
Initial recognition and measurement
 At the commencement date, a lessor shall recognise assets held under a finance lease in its balance
sheet and present them as a receivable at an amount equal to the net investment in the lease.
 Net investment in the lease: The gross investment in the lease discounted at the interest rate
implicit in the lease.
 Gross investment in the lease: The sum of: (a) the lease payments receivable by a lessor under a
finance lease and (b) any unguaranteed residual value accruing to the lessor.
 The lessor shall use the interest rate implicit in the lease to measure the net investment in the lease.
 At the commencement date, the lease payments included in the measurement of the net investment in
the lease comprise the following payments that are not received:
a) fixed payments (including in-substance fixed payments), less any lease incentives payable,
b) variable lease payments that depend on an index or a rate, initially measured using the index or
rate as at the commencement date,
c) any residual value guarantees provided to the lessor by the lessee, a party related to the lessee or
a third party unrelated to the lessor that is financially capable of discharging the obligations under
the guarantee,
d) the exercise price of a purchase option if the lessee is reasonably certain to exercise that option,
and
e) payments of penalties for terminating the lease, if the lease term reflects the lessee exercising an
option to terminate the lease.

35
Finance leases - Recognition and measurement by Lessor
Subsequent measurement
 A lessor shall recognise finance income over the lease term, based on a pattern reflecting a
constant periodic rate of return on the lessor’s net investment in the lease.
 A lessor shall apply the lease payments relating to the period against the gross investment
in the lease to reduce both the principal and the unearned finance income.
Operating leases - Recognition and measurement by Lessor
 A lessor shall recognise lease payments from operating leases as income on either a
straight-line basis or another systematic basis.
 A lessor shall recognise costs, including depreciation, incurred in earning the lease income
as an expense.
 A lessor shall add initial direct costs incurred in obtaining an operating lease to the carrying
amount of the underlying asset and recognise those costs as an expense over the lease
term on the same basis as the lease income.

36
Sale and leaseback transactions
 If an entity (the seller-lessee) transfers an asset to another entity (the buyer-lessor) and
leases that asset back from the buyer-lessor, both the seller-lessee and the buyer-lessor
shall account for the transfer contract and the lease applying below principles:
 When transfer of an asset is a sale
 If the transfer of an asset by the seller-lessee satisfies the requirements of Ind AS 115 to be
accounted for as a sale of the asset:
a) the seller-lessee shall measure the right-of-use asset arising from the leaseback at the
proportion of the previous carrying amount of the asset that relates to the right of
use retained by the seller-lessee. Accordingly, the seller-lessee shall recognise only
the amount of any gain or loss that relates to the rights transferred to the buyer-
lessor.
b) the buyer-lessor shall account for the purchase of the asset applying applicable
Standards, and for the lease applying the lessor accounting requirements in this
Standard.
 When transfer of an asset is not a sale
 If the transfer of an asset by the seller-lessee does not satisfy the requirements of Ind AS
115 to be accounted for as a sale of the asset:
a) the seller-lessee shall continue to recognise the transferred asset and shall recognise
a financial liability as per Ind AS 109 equal to the transfer proceeds.
b) the buyer-lessor shall not recognise the transferred asset and shall recognise a
financial asset as per Ind AS 109 equal to the transfer proceeds.

37
Sale and leaseback transactions
YES NO
Lease assets
Seller-lessee
Transfer assets
Buyer-lessor
Sale of the asset?
Buyer-lessor Buyer-lessorSeller-lesseeSeller-lessee
 De-recognise
underlying asset
 Recognise right-
of-use asset
(proportion of
previous carrying
amount)
 Recognise lease
liability
 Gain / losson
saleof rights
transferred
 Recognise
purchase of
asset
 Apply lessor
accounting
 Continue to
recognise asset
 Recognise
financial
liability
 Do not
recognise asset
 Recognise
financial
asset

38
Example explaining sale and leaseback transaction
Example when transfer of the asset is a sale:
• Carrying amount of asset: Rs. 10,00,000/-
• Sale value of asset: Rs. 20,00,000/-
• Lease payment: Rs. 1,20,000/- p.a.
• Lease term: 18 years
• Discount Rate: 4.5%
• Present value of lease payments amounting Rs. 1,20,000/-p.a. for 18 years at 4.5%:
Rs. 14,59,199/-
Seller-lessee Buyer-lessor
Cash 20,00,000 Asset 20,00,000
Right-to-use asset 7,29,599* Cash (20,00,000)
Asset (10,00,000)
Lease liability (14,59,199)
Gain related to Buyer-
Lessor
(2,70,400)**
*Rs. 10,00,000 (Carrying amount) ÷ Rs. 20,00,000 (Sale value) × Rs. 14,59,199 (PV of lease payments)
**Rs. 10,00,000 (Gain on sale of asset) ÷ Rs. 20,00,000 (Sale value) × Rs. 5,40,801(Sale value less PV of
lease payments i.e. Rs.20,00,000 – Rs.14,59,199)
Accounting in the books of:

39
Presentation
Particulars Lessee Lessor
Presentation in Balance
Sheet
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.
Right-of-use assets meeting
the definition of investment
property shall be presented as
Investment property in the
balance sheet.
Operating Lease: Lessor shall
present underlying assets in
its balance sheet according to
the nature of the underlying
asset.
Finance Lease: Lessor shall
present net investment in the
lease as receivable in the
balance sheet.
Presentation in statement of
profit and loss
Lessee shall present interest
expense on lease liability and
depreciation charge on right-
of-use asset separately in the
statement of profit and loss.
Lessor shall present lease
rental income in case of
operating lease or finance
income in case of finance
lease in the statement of
profit and loss.

40
Disclosures
Lessee Lessor
Lessee is required to disclose amounts
for the following items:
• Depreciation charge for right-of-use
assets.
• Interest expenses on lease liabilities.
• Expenses relating to short term / low
value assets accounted on straight line
or other systematic basis over lease
term.
• Additions / deductions and carrying
value of right-of- use assets.
• Gain / loss arising from sale and lease
back transactions.
• Maturity analysis of lease liabilities.
Operating lease: Lessor is required to
disclose amounts for the following items:
• Lease income
• Variable lease payments that do not
depend on an index or a rate
• Maturity analysis of the lease
payments receivable
Finance lease: Lessor is required to
disclose amounts for the following items:
• Selling profit or loss
• Finance income on net investment in
the lease
• Maturity analysis of the lease
payments receivable

41
Summary
 Ind AS 116 is applicable from 1st April, 2019.
 Ind AS 116 applies a control model for the identification of leases, distinguishing between
leases and service contracts on the basis of whether there is an identified asset controlled
by the lessee.
 Lessee has to recognise a right-to-use asset and a lease liability for all lease contracts
except for short-term leases and leases of low value assets. As a result of this change,
lessee has to recognise almost all leases on balance sheet as compared to off-balance
sheet under previous requirements specified in Ind AS 17.
 Lessor accounting model stays substantially the same under current guidance.
 For lessor, leases are classified into operating or finance lease but for lessee there is no
such classification from now onwards.
 Enhanced disclosure requirement.
 In order to minimize the impact of applying Ind AS 116, lessees may enter into leases with
short term or lease with variable payment not linked to any rate or index.

Comparison
 There is no major difference between Ind AS and IFRS.
 If you have any question then write it on my mail id.
42

Ind AS 116 Leases

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