IND AS 116 – New Accounting Lease Standard

The new standard will require lessees to recognize most leases on their balance sheets. Lessees will use a single accounting model
for all leases, with limited exemptions. Ind AS 116 is likely to be effective for accounting periods beginning on or after 1 April 2019.
Ind AS 116 (corresponding to IFRS 16) is under consideration of the National Advisory Committee on Accounting Standards (NACAS).
Ind AS 116 is likely to be effective for accounting periods beginning on or after from 1 April 2019. However, the option of early
application of Ind AS 116 from 1 April 2018 is proposed.
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 recognise 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 classifying leases as finance lease and operating lease
IFRS 16 primarily impacts operating leases in the books of lessee. It has minimal impact on the lessor accounting. Essentially in an
operating lease arrangement, the lease would now be required to record the lease on the balance sheet as a ROU asset with the
corresponding lease liability. Consequently, the erstwhile lease expense would be bifurcated as an amortization of the ROU asset and
interest expense on the liability. This is a significant change and has a direct positive bearing on the operating profits of the
companies.
As per Para 22 of “Exposure Draft Indian Accounting Standard (Ind AS) 116” At the commencement date, a lessee shall recognise a
right-of-use asset and a lease liability. The objective of the disclosures is for lessees to disclose information in the notes that,
together with the information provided in the balance sheet, statement of profit and loss and statement of cash flows, gives a basis
for users of financial statements to assess the effect that leases have on the financial position, financial performance and cash flows
of the lessee.
Let us understand with the help of example:
Lease commencement date 1 January 2001. Lease payment INR 50 Crore per   Year at the end . Lease escalation 20 per cent after
every three years. Lease term 10 years. Interest rate assumed at 10% PA.

 Rs in Crores

YEAR LEASE Discounting Present Value of

(200X) Factor Lease Payment

1 50 0.91 45.45

2 50 0.83 41.32

3 50 0.75 37.57

4 60 0.68 40.98

5 60 0.62 37.26

6 60 0.56 33.87

7 72 0.51 36.95

8 72 0.47 33.59

9 72 0.42 30.54

10 86.4 0.39 33.31

Total  632.40  370.83

Recognition of lease liability/ROU

YEAR ROU Interest Payment Net Balance

1 370.83 37.08 50 357.91

2 357.91 35.79 50 343.70

3 343.70 34.37 50 328.07

4 328.07 32.81 60 300.88

5 300.88 30.09 60 270.97

6 270.97 27.10 60 238.07

7 238.07 23.81 72 189.87

8 189.87 18.99 72 136.86

9 136.86 13.69 72 78.55

10 78.55 7.85 86.4 (0.00)

–

Particular Impact as per Impact as per IND AS Difference  

s IND AS 17 116 (Proposed) s

Bal P &L Bal P &L Impact on  

Shee Sheet Profit-
t ability

Year NA Lease Right- Amort Interes Total Excess  

Expenses of-Use - t Exp. Expenses
’ Asset ization Exp. /
(Short)

0 370.8
3

1 N/A 63.24 333.7 37.08 37.08 74.17 10.93 Expense

5 increased
Profit
2 N/A 63.24 296.6 37.08 35.79 72.87 9.63 Decrease
6 d

3 N/A 63.24 259.5 37.08 34.37 71.45 8.21

8

 4 N/A 63.24 222.5 37.08 32.81 69.89 6.65

0

5 N/A 63.24 185.4 37.08 30.09 67.17 3.93

1

6 N/A 63.24 148.3 37.08 27.10 64.18 0.94

3

7 N/A 63.24 111.2 37.08 23.81 60.89 (2.35) Expense

5 decreased
 8 N/A 63.24 74.17 37.08 18.99 56.07 (7.17) Profit
Increased
9 N/A 63.24 37.08 37.08 13.69 50.77 (12.47)

10 N/A 63.24 (0.00) 37.08 7.85 44.94 (18.30)

Total 632.40 261.57 632.4 (0.00)  

0

As per Para 26 -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. The lease payments shall be discounted using the interest rate implicit in the lease, if that rate can be
readily determined. If that rate cannot be readily determined, the lessee shall use the lessee’s incremental borrowing rate.
In the Year 1, Expenses under IND AS 116 is more by 10.93 Crore and correspondingly we have to recognize asset in our books
as “Right of use asset” at Year Beginning for Rs.370.83 Crores and same is amortize during 10 Years and corresponding impact will
be of recognize Lease liability of RS 370.83 as other Liability. However Expense under IND AS 116 will create time gap only as shown
in above table.

The main impact of IFRS 16 will be to bring assets held under operating leases and the lease liabilities onto balance sheets and
including the information on operating leases on the balance sheet and statement of profit and loss would mean that this
information would be easily available to all investors to enable accurate estimation of a company’s liabilities.
Comparative Analysis
Although the objective of the IASB and FASB was to have a unified set of rules, there are still some differences
in the standards issued. Significant areas of differences have been discussed below.
IFRS 16
If a lessee applies the
fair value model for
investment properties in
accordance with IAS 40,
Investment properties, it
Investment shall apply the fair value
property model for right-of-use assets
that meet the definition of
investment property.
Right-of-use assets may be
presented either separately
or within the same line item
within which the
Presentation corresponding owned assets
in balance would be presented.
sheet
Similar option is available
for presentation of lease
liability.
The income statement
recognition for all the leases
will consist of amortisation
of the right-of-use asset and
Presentation interest expense related to
in income the lease liability.
statement
Ind AS 116
The option to
subsequently carry right-
of-use assets at fair value
is not available.
Right-of-use assets and
lease liabilities shall be
presented on the balance
sheet or disclosed in the
notes separately from other
assets and other liabilities.
Similar to IFRS 16.
ASC 842
The option to subsequently
carry right-of-use assets at
fair value is not available.
Finance lease right-of-use
assets and operating lease
right-of-use assets shall be
separated from each other
and from other assets and be
presented either in the
statement of financial
position or disclosed in the
notes.
Similarly, finance lease
liabilities and operating
lease liabilities shall be
separated from each other
and from other liabilities.
There will be a different
pattern of recognition for
lease classified as operating
leases in which the
amortisation of the right-of-
use asset and interest
expense related to the lease
liability will be recorded
together as a lease expense
to produce a straight-line
recognition effect in the
income statement.
2
 IFRS 16 Ind AS 116 ASC 842

Repayment of interest may Interest payments are to Interest payments are

be classified as either an be presented as a classified as an
operating or financing financing activity. operating activity.
activity.
Presentation
in statement
of cash flows

Recognition Similar to IFRS 16. No exemption for low

and measurement value leases.
$ exemption are available for
low value leases.
Exemption

Reassessment of a lease Similar to IFRS 16. Change in the lease

liability is required if change payments as a result of a
in lease payments occurs as change in index or
a result of a change in an rate is not a reassessment
Variable index or rate. event.
lease
payments

Lessee accounting

 Lease liability is initially recognized and measured at an amount equal to the present value of
minimum lease payments during the lease term that are not yet paid.

 Right-of-use asset is recognized 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
lessee.

 The lease liability is measured in subsequent periods using the effective interest rate method. The
right- of-use asset is depreciated in accordance with the requirements in Ind AS 16, Property, plant
and equipment.

 Recognition and measurement exemption is 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.

 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.
Key impact
Lessees were hitherto required to screen and distinguish each of the lease arrangements 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. Optional exemption is available in respect
of short-term leases and low-value assets.

Source:- https://www.pwc.in/assets/pdfs/services/accounting-advisory/a-new-era-of-lease-accounting.pdf
https://taxguru.in/chartered-accountant/ind-116-practical-aspects-lessee-perspective.html
GG/March 2018-12319