Ind AS-116 : Leases

SJ's Drone View

A B C D E F G

n
Background Transitional
Sub leases (Head Impact on other Presentation & Dis-
Lessee Accounting Lessor Accounting Sale & Lease Back
lease & lease) Provisions standards closure

io
Finance Lease Ind AS 16/38/41
Operating Lease
Identifying whether contract contains Ind AS 21/23
a lease?

at
Ind AS 115
A Contract or (part of c ontract) conveys
Definition of Lease [A6] etc.
A2 - DOI A1 - DOI A4 - in
Lessee accounting Right to control A3- for a pe- exchange
of an identifiable for Special Issue

uc
Identifying whether contract is a lease the use riod of time consideration
asset (Ind AS 109)
RoU Asset

Lease [A5]
IR
Lease liability [A1] Identifiable asset
&
then it will be a lease & [A2]
SJ Tips
contract or part of contract not just a contract to ac- Right to control the use

Ed
SM Includes quire goods & services.
Reassessment &
LC - Lease NLC - Non Lease Modifications
that conveys the: Explicitly identified in the contract If supplier's right to What happens when only a
components components or implied substitute is only after part or a portion capacity of
a period of time/only assets is provided to customer
[A7]
Lessor has no (SSR) on fulfillment of a con- for use
[A2]
Right to control
the use of
[A1]
an identifiable
asset

Date of inception (DOI)

[A3]
for a period of
time
[A4]
in exchange of a
consideration

Date of Commencement (DOC)

ST
Lease accounting

Scope, Exclusions &

exemptions
(substantial substitution rights)

R is said to have a SSR if:

(Identification of Lease)
Earlier of
(a) Date of lease agreement
(b) Date when parties
principally agree to the
items of lease
Relevant to assess whether
contract involves a lease
dition, then assume
no SSR. Treat asset to be an
identifiable asset (IA) only if
FA
(Accounting for Lease) Short Low
Term Value Practical ability to Supplier has economic Physically Distinct Else
Lease Assets substitute the asset benefits through substitution
throughout the period (Benefits expected from subs.
of use ( )& > Costs of subs. for supplier) Not an IA unless the capacity given to
Date when the asset is
customer represents substantially the
made available for use by
Generalisation to establish whether supplier has SSR: whole capacity.
the lessee
(a) “Usually” if asset is physically with the customer, the cost of substitution will be high and it may
give not economic benefits to supplier
Relevant for all other pur- (b) Supplier to substitute only in event of breakdown or technological changes  No SRR
(c) If customer cannot readily determine whether supplier’s right to substitute are substantive
pose including recognizing
then he can prescribe that the suppliers ‘SSR’ do not exist
the Right Of Use Asset &
Lease Liability (d) SSR checked at DOI ignoring events of future not like on DOI like substantial unexpected change
in market price, use of asset, technology etc.

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 Ind AS-116 : Leases

[A2] Right to control the use

Lease : Contract (part of contract) that conveys the
Right to Obtain – SAEB Protective Rights
RTD Right to Direct an identifiable in exchange for
(within the scope of rights (of suppliers) [A1] asset [A2] right to control [A3] for a period of time [A4] a consideration
given in contract) the use of (LEASE TERM)
Use of asset
Right to obtain Rights kept with
[A3] LEASE TERM (LT)

substantially all
economic benefits [SAEB]
from the “use of asset”
n
Will be with the customer if he has right to take decisions about
supplier either to
protect his interest or

io
to comply L & R are 1 Defined in terms of Time or Usage
Right to take decision usually if customer can decide who functionally protective rights and
Economic benefits operates & 2 Also depends on the provisions of Contract Act.
hence do not interfere
maintains the with the RTD – use of

at
3 LT = Non-cancellable (NC) period of lease (subject to discussion on
T W W W asset is not the asset. termination/extension option in lease agreement).
Direct or Indirect
Type of When to Whether Where to basis of
output produce & what produce determining who
They just define

uc
quality to has the RTD the
use of asset the scope of
produce 4 Situations relating to NC/Cancellable Lease Term (LT)
contract.

Use of asset

Ed
Use by Ownership related
customer benefits even if not
or by with customer it still
subleasing has right to control,
to others or
outsource
if it has right to
obtain – SAEB from
use of asset
ST
If the uses of assets are predetermined
(scope of contract defines it uses)
FA

OR

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 Ind AS-116 : Leases

[A3] LEASE TERM [A4] Lease Payments (LP)

5 Renewal/Termination options

This will affect the LT if entity/lease is reasonably Lease Term - Reassessed /Revision
certain to exercise/not exercise the renewal/
termination option
Factors affect decision to exercise/not exercise an

n
option:
When E exer-
1. Factor as existing on DOI are to be seen ( cises or lapses

io
future unplanned or the extention/
OR
unanticipated events term ) termination option
Potential new customers, new technology against originally

at
may get developed, alternate use of asset, intended.
significance, difference in market value etc. Significant event/
2. Factors will influence the lessee’s decision to changes that affect Example.
extend the lease term: significant
the E’s option to Legal

uc
a) Contractual terms Renewal option price, exercise/terminate restriction
Renewal period, etc. the LT on using UA
b) Whether any substantial modifications are made
by lessee on UA (underlying asset)

c) Specialised nature asset
d) Cost of termination/relocation
e) Location of underlying asset (UA).
f) Conditional extention Chances/Probability of
condition to be exercised.
g) Alternate lease connected to that asset.
Ed
E.g. Entering into another lease for an adjacent asset, heavy leasehold improvement
by E/Modification to UA, Subleasing of asset for extended period, acquiring another
similar asset, etc.
6 Lease Term starts from DOC

ST
and also
when the asset is available for use.
includes any initial rent free period
Eg.1: LP 10L
p.a. provided
asset is
operational
Eg.2: LP 2L p.m.
or 5% of turnover
whichever is higher
2L p.m. is FLP in
Eg.3: LP 2L p.m. or
5% of turnover of
E, which is lower.
Past experience,
FA
Generalisation for opting for the In substance substance being the turnover is 50L p.m.
extention option FLPs minimum LPs under FLPs in
the contract substance is NIL
Initial LT is short, chances of exten-
tion will be high.
Past practices would be considered
If Lessee has guranteed minimum
returns to Lessor, chances of exten-
tion increase/
Substantial cancellation penalty,
then E may not exercise termination
option

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 Ind AS-116 : Leases

[A4] Lease Payments (LP) (contd...) [A5] Contracts involve multiple LCs or LCs & Non-LCs & Portfolio Based Application or
Combining Contracts
B. Variable LPs agreed in agreement to be determined
LPS : based on certain outcomes:
Combining Agreements & Portfolio Applications

n
Seggregating Components Combining agreement *Lease components of multiple identifiable assets
represents separate LC if and only if the lessee can:

io
LC + LC LC + NLC

E.g. Furnished office E.g. Flat with club

at
&
taken of lease membership on lease If contract involves no
separate g/s being supplied
then it is not regarded as a

uc
separate NLC of the lease
Eg. Administrative or
maintenance services Combining contracts
provided by lessor
* Lessee has entered into 2 or more lease agreements/
LC1+LC2 +NLC

Ed
Eg. Paying taxes etc. contracts can it be combined as one lease agreement?
Eg. Furnished flat with club Date of Inception Combined if
membership SJ says
C. Residual Value Guarantee
Accounting: Based on Standalone
E guarantees any value at end of LT as a
E. Renewal/Termination Option prices (if not available maximise, the &

consideration for t/f of title of asset
Treated as part of ‘LPs’ as E is obliged to pay
Lessor’s view point: RV has separate definition ST
As per decision on Lease Term, the
price of renewal option/term option
will be included/excluded from LPs.
• Taxes
Property Tax payable by
use of observable inputs) to be the basis
for seggregating LPs into LCs/NLCs. LC
accounted in 116, NLC accounted in
respective Ind AS.

D. Purchase option
E at end of LP has
option to purchase asset
at price significantly less
than estimated market
price on that date then
‘E’ will assume to pay
such purchase option
and hence include in
LPs (even though E can
avoid such obligation,
but considered in
substance he will not)
Example : Audi co. ls 5
years lease take a
car LPs 10 L p.a.
Option to pay 2L after
4 years to permanently
acquire the car, else return
the car after 5 years.
Ans. : Purchase option @
2L seems to be at sign. less
than from expected after
5 years hence it will be
considered as a part of LP
PE:
FA
“E to R” then it is included in LPs as
Available in con-
E paying R under lease agreement
tract that involves
against the RTU of asset OR OR
single LC and one
• GST on LRS:
or more NLCs
ICAI clarified that GST is
not a liability of ‘R’ like property Portfolio Application (E.g. Indigo – Boeing 737)
tax, rather liability of ‘E’ which is to
Lessor: Seggregation of If entity regularly enters into contract for lease of
be discharged on his behalf by R to LPs based on standalone price
identifiable assets that are similar in nature, then it
govt. or observable market inputs to
should account them separately unless accounting
Hence R’s collection of GST on LPs
be used on date of inception the mas a single portfolio with not give results
is not included in LPs as it does not
of contract as per Ind AS 115 materially different from accounting them individually.
represents payment against RTU the
principles In such cases common estimates for every contract in a
asset but merely discharge of E’s
portfolio can be taken.
statutory liability.

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 Ind AS-116 : Leases

[A6] Accounting for Lessee

Example
W.N.3 : ‘Right-of-use’ Asset
LPs 10,000 p.a. (end of year)
I.R. on DOC = Initial Recognition value of LL = 31,700 Accounting for lessee
LT 4 years Example:
Depreciation p.a. = Cost – RV = 31,700 – 0 = 3,170
Life of underlying asset 10 years Aircraft FV to lessor 50 crores
(assuming SLM & RV is NIL) life 10 years
The asset will be transferred to ‘E’ after end of LT L Accounting of ‘LL’ R Accounting of ROU Asset Initial brokerage on purchase
provided LPs are not due. Journal Entry for first 4 years 2 crores borne by ‘R’

n
Implicit Interest Rate of Lease 10% p.a. LPs Fixed LP20 crores p.a.
Year I Year II Year III Year IV L.1 L.2 R.1 R.2 (arrears), 3 years

io
1. R-O-U Asset Dr. 31,700 x x x + Guaranteed RV by lessee
To LL 31,700 x x x L1: Lease Liability: IR: Book of Lessee 1 crores
Solution
+ UGRV expected by lessor

at
W.N.S: PV of LPs disc. at ITR (IIR) 1. Recognised on DOC additional
Year LPs D.F. 10% PV 2. Interest Expense Dr. 3170 2487 1735 908 2. Initial value of Lease Liability = PV of Lease payments that are 1.5 crores
To LL 3170 2487 1735 908 pending payments on DOC (IR)
1 10,000 0.909 -

uc
2 10,000 0.826 - 3. LL Dr. 10,000 10,000 10,000 10,000 3. PV Discount factor Discount factor is the implicit
To Bank 10,000 10,000 10,000 10,000 interest rate. If not available
3 10,000 0.751 -
then the incremental
4 10,000 0.683 - borrowing rate for the lessee.

EPV of LPs =31699 or 31700 approx
W.N.2
Lease Liability (LL) {Amortisation Table}
Ed
4. Depreciation Dr. 3170 3170 3170 3170
To R-O-U Asset 3170 3170 3170 3170
4. IRR Calculated from ‘R’ viewpoint
IRR is a rate which equals:
5. Profit & Loss Dr. 6340 5657 4905 4078
PV of (LPs + RV = Fair value + Initial
To Interest 3170 2487 1735 908
to lessor of asset direct cost

Year OP+

I 31,700
Interest (10%)- LPs=

3,170 10,000
Balance

24,870

ST
To Depreciation 3170 3170 3170 3170

Solution:
(unguaranteed)) for users of lessor
FA
II 24,870 2,487 10,000 17,357 Using Interpolation:
Accounting books of lessee
Say x is 10% p.a., RHS 20 x 2.4869 + 2.5 0.7513
W.N.1: IR,
III 17,357 1,735 10,000 9,092 49.73 + 1.88 = 51.60
PV of 20 crores for 3 years + 1 crore after + 1.5 crores
3 years after 3 years x is 9% p.a., RHS 50.63 + 1.93 = 52.56
IV 9,092 908* 10,000 NIL (LPs) x % = LR + VLR – VD x (HR – LR)
(UGRV)
VLR - VHR
*909 rounded to 908 = FV of Asset / 50 crores + R’s 1DC 2 crores =9% + 52.56 – 52 x (10 – 9)%
= 20 x AF 3 year x% + 2.5 x PV 3rd x% = 50 + 2 52.56 – 51.60
= 52 = 20 x AF 3 year x% + 2.5 x PV 3rd x% = 9.58%, say 9.6% p.a.

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 Ind AS-116 : Leases
[A6] Accounting for Lessee
Lessee L.2: Subsequent Measurement of LL
IR LL 20 x AF9.6%
3
+ 1 x PV9.6%
3rd

= 50.85 L.2: Remeasurement of LL

Lease Amortisation Table Remeasurement/Modifications (Change in LL recognized due to changes in estimates/intention made by E earlier, but not
due to change in lease terms which is termed as modification)

n
SM LL (or change of Vr. LP to Fixed LPs)
IR of LL & Remeasurement (on DOC)
Year Op. Interest 9.6% LPs Balance IR Interest at IIR/IBR LPs done

io
Remeasurements Modifications Change of VLP
I 50.85 4.88 20 35.73
in lease contract PV LPs
II 35.73 3.43 20 19.16 to Fixed LPs

at
DF
III 19.16 1.84 20 1 Example: DOC 1-4-2021
LPs 100,000 p.a. + 10,000 p.a., if in any year annual sales of Fixed Vr RV Purchase Term
LPs LPs Option Option
E > 5 crores (irrespective of future sales of E going below 5 crores) IIR of (else) IBR for

uc
Hence, Fixed LP 100,000 Lease lessee

52 – 50.85 = 1.15 (1.50 x PV9.6%
3
) variable LP 10,000 p.a. ignored in IR of LL Index/Rate Other If reasonably certain
(on DOC) to be exercised by E
But if E’s sales >5 crores then 10,000 p.a. will be fixed hence fixed LP will be 110,000 p.a. Based
(Cost to R) (IR of E) Being URGV Not
This is an example of variable LP (other than index rate based) converting to fixed LPs on

Ed
Remeasurement in LL due to Part of LPs considered
happening of a contingent event. Guaranteed
and under LPs
by E
5. Incremental Borrowing Rate for Lessee Accounting Remeasurement accounting applies (same as remeasurement
Index rate All other considered in & simply
changes/RV changes IR of LL using charged to
Lessee if took a loan for similar asset/amount/ accounting due to change in index/rates). expected to
changes any Index Rate Profit or
term, on DOC, what rate of interest should have be paid by E
been charged by lender This is E’s Revised on DOC & Loss
(ROU Asset change due to will be
incremental borrow rate. (IBR)

Rare
ST Discount factor original jgsxk
remeasurement of LL) accounted
using
original
interest rate
discount factor
on date of
remeasurment
to be
considered
thereafter as
per Index Rate
existing on
date of
measurement
FA
Discussion
If IBR or IIR is based on a SJ Tips: (Change in LL due to
variable let’s say repo + x% Remeasurement/modification remeasurement
then every year the s interest rate revise
(any reason)
discount factor will change on date of remeasurement
will be adjusted
due to change in repo or modification except in
through
rate (not due to the this case
ROU ASSET)
change in x%)

SJ Exclusive

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 Ind AS-116 : Leases

L.2: Subsequent Measurement of LL

Modification of LL (Interest Rates to be revised as on date of modi.) R.1: Right of use Asset: IR Accounting : Books of Lessee
(Change in leaseterms)
(a) consideration is on (1) IR date (DOC) ROU Asset to be recognised at:
standalone basis & LL on IR xx
(b) asset + Lease Payments already made (hence not included in LL) xx

n
- independent use Scope reduced, or – Lease incentive (received by E from R and not adjusted in LPs) (xx)
- not highly interested Yes Whether there No
Scope same, terms modify IR value of ROU asset to be further adjusted xxx

io
is an increase
in scope? for :
Account it as Remeasurement
a) Initial Direct Costs by E xx

at
Whether it Remeasure LL and (Cost incurred by E, that would not have been increased if lease
is a separate Remeasure ROU Asset contract was not entered into)
No
lease?
Remeasurement

uc
accounting applies b) Provisioning for Decommissioning, Removal or Site Restoration Provided xxx
Yes First, when Any other for (as per Ind AS 16/37) (except if it relates to production of inventory)
that is a scope change in LL
Account it as fresh Remeasure LL IR value of ROU Asset xxx
reduction adjusted from
lease & not as a *If lessee increases any leasehold improvements before DOC of lease
ROU asset like
modification Adjust ROU Asset

Ed
Reduce the in case of then such expense is to be recognized as an asset under Ind AS 16/38,
modification remeasurement as per recognition criteria given therein.
date ROU asset
(In proportion & LL R.2: Subsequent of ROU Asset
of scope proportionately
reduction)
SJ Tips:
Remeasurement/ Modification
LL value changes adjusted
from ROU Asset except in case
of scope reduction (modifica-
Gain or Loss to
P or L
ST Cost or
Revaluation
Approach (Ind
AS 16/38)
Depreciation
or Amortisation
(Ind AS 16/38)
Impairment
of Assets
(Ind As 36)
ROU Asset may be
adjusted due to
remeasurement/
modification of LL.
FA
tion) difference of change If any adjustments made then it is
ROU asset & LL due to scope accounted prospective i.e. depreciation to
t/f to P or L. change propectively.

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 Ind AS-116 : Leases

Scope – Exemptions – Exclusions: Applicability of Ind AS 116 *Sublease Head Lease does not qualifies for LVA exemption

A LVA exemption N.A.

B books esa Lessee
B
Lease Sub-lease accounting of 116 applies
Applicability Exclusions Optional Exemptions (Imp)
C

n
ST Lease Lease Still has available
Lessor accounting always 116 exemption
Ind AS 104 Ind AS 41 Ind AS 115 Ind AS 38 of Low
be as per Ind AS 116

io
value
(Lessee)
Biological asset
Exploration
and Evaluation Assets on Examples of LVA:
Service “Lessor” To not May not

at
Activities lease with
Concession of IPR apply 116 on apply 116 Office furniture, small appliance, mobile, desktop/computer/
the lessee
E.g. Leases to Arrangements licensing rights IA on other IA IT equipments, storage devices, etc.
explore oil, gas, that even
Eg. Public E.g. movie rights,
reserves etc.

uc
Private patents, qualify to
Partnership copyrights etc. be a lease
LESSOR ACCOUNTING

ST Leases

Ed
Definition Classification of Lease Accounting by Lessor
Sale and Lease
1 Optional exemption 6 ST Lease Only recognition back
exemption for E. Lessor (covered
2 Choice is made a class of UA that 7 In case of modification of ST Lease FL OL separately)
are taken on lease for ST Finance Operating Reclasification/ Lease of Land &

3 ST means
(DOC)
Period < 12 months
consider it as a fresh lease on date
of modification and accordingly by
account
ST New Asset’s value is considered
Finance
Lease (FL)

Operating
Lease Lease Modification Building Combined
Low Value Asset Exemption (LVA)

Eg. After 3m extended by

4 Accounting if exemption opted 8 month Low value in absolute terms and materiality Lease (OL) Plain Lessor Manufacturer/ Current/Non-current
from lessee’s view point is not relevant
FA
Expense the LPs over the LT on LT - 6m DoM (Financer) Dealer Lessor Unguaranteed Presentation of
SLM basis; 6m - 3m + 8m Residual value receivable
Unless: = 11m (for lessor)
Lessee has option to not account under ACM Types
another systematic basis is more (still eligible for ST Lease exemption) Accounting Revenue Recog-
representative of E’s use of asset even if 14m from DOC Ind AS 116 and hence should charge of the nition + Interest
LPs on SL basis or other systematic basis Income
5 ST Lease exemption for class of UA 8 If there is a purchase option, then Asset: Re-
is a choice of accounting policy ST Lease exemption does not ap- ceivable
plies. Option is available asset wise.
Income: Asset: Receivable
Interest/ Income: Sales +
Income Interest Income
Asset used independently (not highly
inter-related with other asset) and
has its own benefits

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 Ind AS-116 : Leases
CB R Leases an asset to E
Finance Lease: Plain Lessor
Definition Fair value/cost of asset to R 120 lacs
1 On buying asset to be given on lease Recognise an ‘Asset for Lease’ LRs 50 lacs p.a. for 3 years
Lessor Person that gives the Right to use the underlying asset LT 3 years
for a period of time in exchange of consideration Life of Asset 3 years
2 On DOC of lease debit Lessee Residual value expected to be (after 3 years) 12 lacs
Finance A lease that t/f substantially all risk & rewards credit Asset for lease Lease guarantees RV of 5 lacs only
Lease incidental to ownership of underlying asset.
* Accounting books for ‘R’
Operating A lease that does not t/f substantially all risk and

n
Lease rewards incidental to ownership of underlying asset. 3 IR amount PV of lease payments + net investment in lease +
PV of UGRV [Net Investment in Lease]
Lease is finance lease as LT = Life of asset
Gross invest in lease = ∑ LPs + UGRV
LPs: FLP = 50 L p.a. x 3 years = 150 lacs

io
RV (Guaranted) = 5 lacs
Imp. Classification of Lease (Lessor) Residual Purchase Or Termination
LPs (Total) = 150 +5 = 155 L
Fixed lease Variable UGRV = 12L (Total RV) – 5L (GRV) = 7L (UGRV)

at
(Financial Lease) payments net LPs based value option price Price
of lease on an guaranteed when it is Gross invest in lease = 155L + 7L = 162L
(Non incentives index/rate by lessee/3rd reasonably
Examples Indicators Other Indicators Net invest in lease = Cost of asset = 120L
conclusive) adding IDC party certain to be

uc
IIR x% = 120 = 50L x AF3xx% + 5L x PV 3rd x% + 7L x PV 3rd x%
exercised by
x is 14% p.a. (RHS) = 50L x 2.3216 + 12L x 0.675
LT covers Renewal option given Put/call the lessee
= 116.08 + 8.10 = 124.18
substantially whole to E, reasonably expected option x is 15% p.a. = 50L x 2.2832 + 12L x 0.657 = 122.05
part of life of asset to be exercised & LT + Or x is 16% p.a. = 119.98 or 120/-

Ed
Renewal period covers LRs 4 UGRV : RV expected to be recovered by ‘R’ but not guaranteed by
Or substantial life of asset E/3rd party
designed to Lease Amortisation Table
Asset t/f to E at Lessee Account in books of Lessor
cover : This too is part of gross investment in lease (LPs + UGRV) and
end of lease term
investment return/ included E’s IR amount of receivable known as Net investment
Or Residual value in lease �PV of (LPs + UGRV)) Year Op. Interest 16% LRs Balance
operator’s
guaranteed by E to R I 120 19.20 50 89.20
Purchase such that it guarantees margin : Lessor to remeasure UGRV every year end/reporting date to
option given to
E & reasonably
certain to be
exercised
minimum return to R.

Termination
option with E,
Or

ST
Variable
LRs significant
proportion
hence OL

:
identify if these is a reduction
Any decline to change R’s “IIR” in lease retrospectively
(without restatement) from current period accruals
(Ind AS 116 requires no other case of remeasurement by lessor)
II
III
89.20
53.47
* 8.53 ~ 8.55

14.27
8.53*

IV th year If R sold asset at

50
50

(I) 12L
(II) 10L
53.47
12.00

No P/L
2L loss P/L
FA
Or unreasonable to
be exercised (III) 13L 1L gain P/L
Asset is so specific 5 Implicit Rate of interest that lessor charges/expects to receive under BS presentation
that it has no other Interest Rate : the lease arrangement.
use for Lessor : (Manufacturing or Dealer lessor): If this is artificially reduced Year 1 Balance Sheet
(manufacturing/dealer lessor) then market interest rates NCA
Or
treated as IIR. Lessee/Receivable 53.47
PV of LPs (B.F. - 89.20 – 35.73)
: IIR is the rate which discounts G. I. in lease to N.I. in lease.
substantially covers CA
the cost of asset Lessee/Receivable 35.73
(50 – 14.27)

SJ Tip for C/NC classification

1st Step:
2nd Step:

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 Ind AS-116 : Leases
Books of Lessee Manufacturer/Dealer Lessor What if the interest rate was
(E.g. Boeing Company is selling its aircraft on lease) (a) 10% p.a.
1. DOC - Lease Liability & Roll Asset
(b) 13% p.a.
= Discount LPs @ IIR (16%) E.g. Find Revenue on sale? & Interest income for each year?
= 50L x AF, 3, 16% + 5L x PV, 3, 16% Cost of production of aircraft 50 crores
as Lessee’s obligation only for 5L Selling price/cash price/fair value of leasehold interest 60 crores Sol.
= 50L x 2.2459 + 5L x 64.7 Option to purchase on lease 25 crores p.a. x 3 years 10% p.a.
LT 3 year after which asset t/f to lessee E.I.R. 12% p.a. W.N.1: Sales Price: Lower of
= 115.50 (and not 120) Show accounting in books of lessor ‘R’ (Boeing Company) (a) FV 60 crores
(b) PV of LPs (25 x AF 2 10%) 62.17 crores
2.

n
Lease Liability (Payable to R) ROU Asset Sol. Hence S.P. 60 crores
Year Op. Int. 16% LP Bal. OP. Depr. (SLM) Bal. (a) Revenue recognised as per Ind AS 115 Hence “Lessee” IR value 60 crores
- When Performance Obligation (PO) is satisfied Therefore IIR to be such that PV of 25 crores for 3 years = 60 crores (which will not be if
I 115.50 18.48 50 83.98 115.50 36.83* 78.67

io
- In case of goods, when control over asset is transferred interest rate is 10% p.a.)
II 89.98 13.44 50 47.42 78.67 36.83 41.84 - Usually in case of lease it will be “DOC”. Hence IIR - recalculated such that
III 47.42 7.58 50 5 41.84 36.84 5 60 = 25 x AF 3 x%
(Ind AS 116 defines sales price as this) x = 12%

at
*115.50 – 5/3 = 36.83 p.a. Amount: Selling price -
(a) Fair value of leasehold interest Or Lessee Amortisation: Same as previous case
R -variable LPs (b) PV of LPs, whichever is lower
other than index/rate based feyrs gSa then recognized as income Selling profit: Selling price – Cost of production/purchase
Finance Income over lease term: Total Profit – Selling Profit

uc
Interest rate 13% p.a.
Sol. W.N.1: Sales: Lower of
What if in the 2nd year ‘R’ re-estimates RV to be 9L instead to 12L? W.N.1: Selling price (a) FV 60 crores
 No change in accounting for lessee (a) Fair value of leasehold interest 60 (b) PV of LPs 25 X AF, 3, 13% 59.0 crores approx
(b) PF of LPs: 25 AF 3 12% 60 approx

Ed
Accounting books of lessor Sales of 59
Year Op. Interest 16% LRs Bal. Selling price = 60 crore Hence selling profit will be 59 – 50 = 9 crores only &
I 120 19.20 50 89.20 IIR will be 13% p.a.
II 89.20 - 50 - W.N.2: Selling Profit
III - - 50 9 = SP – COP Lessee Amortisation Table:
= 60 – 50 = 10 crores Year Op. Interest 13% LP Balance
Re-measurement of IIR due to change in UGRV I 59 7.67 25 41.67
W.N.3: Total Finance include
120L
x is 14%
x is 15%
= 50L x AF 3 x% + 9 x PV 3 x%
= 122.16
= 120.08 or 120

Year 1 interest income recognised @ 16%

Year 1 interest income to be recognized @ 15%
(Post re-measurement (120 x 15%))
19.20
18.00
ST
= (25 x 3 – 50) – 10 = 15

W.N.4: Lease Amortisation Table

Year Op.
I 60
Interest 12%
7.20
LR
25
Bal.
42.20
II
III

41.67
22.08
5.41
2.92
16.00
25
25
75

Formula :
22.08
NIL
FA
Interest reversal at year 2 (C.Y. Interest include) 1.20 II 42.20 5.06 25 22.26 Accounting for Mfg./Dealer Lessor
Hence Op. Lease Rec. 89.20 – 1.20 = 88* III 22.26 2.74* 25 NIL Sales = PV of LPs excludes UGRV
*2.67 ~ 2.74 15.00 CoGS = Cost Price / CoP - PV of UGRV
Year Op. Interest 15% LR Bal. Lessee IR amt = PV of LPs + PV of UGRV
I 88* 13.20 50 51.20 Journal Entry: On Date of t/f of Control /DOC (as discussed in plan lessor also)
II 51.20 7.80* 50 9
DOC Lessee Dr. 60
Q. Interest income in each year? To Revenue (P or L) 60
Ans. P or L Dr. 50
Year Interest income To Cost of Production 50 SJ Tips
1 19.20
2 13.20 – 1.20 = 12
3 7.80

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 Ind AS-116 : Leases

Sale and Lease Back Transaction

Sale & LB (esa LB In case asset is sold and leased back such that there Accounting for S & LB
Finance Lease is no t/f of R & R substantially associated with the
asset then thetransaction will be accounted simply Step I
A B S) like a financing transaction under Ind AS 109 Proportion of FV of Rou Asset to FV of underlying asset
Sale and lease back Sale and lease back
Step II
Sale & LB

n
Allocate selling profit to Rou Asset 4 (Say 'x')
lessor's view point In substance lessor's and balance4 (Say 'y')
Operating Lease there is no view point Finance

io
'Sale' Lease
Step III
Recognise Rou Asset at
SJ Interpretation FV of Rou Asset - SP Proportion as above (x)
1. CA has lost control over the asset completely Whether it Recognise LL 4 as usual

at
2. However, it still has retained R-O-U asset for 2 years is a sale as No Accounts S & LB as Selling Profit 4 'Y'
3. Hence, since it is 'sale' (being controlo transferred) sale per Ind AS Financial Instrument
of office floor should be recognised - Ind AS 16/115 115
4. Transfer profit on sale of office floor shall also be recog-

uc
Journal Entry
nised.
5. Thereafter R-O-U asset & LL should be recognised by disc. Yes
FL FA Bank A/c Dr Sale Proceeds
LPs at I.I.R. for for
6. But the LPs representing market rentals, would lead to E R Roll Asser (FV of Rou Asset - Dr. at proportional CA
recognition of R-O-U asset at PV of LPs i.e. market rates Proportionate selling profit)

Ed
and hence the asset will be recognised at fair value and Transaction
not 'Cost' (in fact CA of such asset) sold & required for use at > FV of To Gain on transfer (P or L) Proportionate selling profit
by same party. Asset (excl. Rou Asset related profit)
Thereafter Ind AS 116 requires for S & LB transaction Under 109 To LL PV of LPs
accounting, in books of seller - lessee should be such that To PPE / Asset CA
profit is only recognised for the proportion of asset that is ac- Yes
tually sold No
or
simply profit should not be recognised on proportion of asset
that is retained with the seller in form of R-O-U asset.

Sale & lease back

ST Then split the transaction
into financing and S & LB
transaction
FA
SP < FMV & Yes
not distress FV - SP treated as prepaid LR &
Sale is at market Sale not at market sale accounting of S & LB applies
rates rates

Already disscused Higher SP & Lessor SP & No

Higher LR Reduced LRs

Reduced SP (unless Accounting of S & LB applies

Excess of SP over Hence LRs to be distress sale) due
fair value regarded allocated between to reduced LRs
as a separate con- financing activity & hence difference of
tract of financing leasing activity FV & SP treated as
prepaid LRs.

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 Ind AS-116 : Leases

LESSOR BOOKS

Operating Lease Lease of Land & Building SUB-LEASES

1. 2. 3. Lease Sub-Lease

n
A (Lessor) B (Lessee) C (Lessee/
Lessor continues to recognise LPs recovered/earned to be IDC incurred by lessor are Ind AS 116 states for lease of Land and Building combined Sub-Lessee)
the asset given on OL in its credited to P or L over the capitalised & charged to P or L

io
book as PPE/Intangible Asset lease term on SLM unless any in proportion of lease rentals/ Original Intermediate
and also depreciates other systematic basis repre- payments. Lease incentives giv- Usual Lessee Lessor Usual
amortises it over its sents consumption of benefits en by R to E also are regarded accounting accounting
for lessor Operating/
estimated useful life. by lessee. as adjustment to the LPs. ROU & LL of lessee

at
Land finance lease
component is Yes
Treat the lease as a lease of BUILDING only
Modification of Lease Contracts insignificant
Sub Lease

uc
Existing Existing Usually lease of:
No a) Building may be FL
Finance Lease Operating Lease (Head) Lessor
b) Land will be OL Intermediate Lessor
or Sub Lessee
Treat it as a fresh lease

Ed
Inner in scope & contract Whether
consideration in fair value of Allocate LPs (including down payments,
IDC, incentives, etc) to land and building Accounting as
independent? and leasehold interest in Yes Head Lease Sub-Lease
in proportion of respective FVs, on Date of usual under 116
Yes No land and building (A&B) (B&C)
separately Inception
Accounting Any amount of accrued/ out- identifiable?
Modification to standing LR balance treated
modification as a Usually case of Then
separate lease

If the modification, if
done on DOC, would
existing lease

Else
ST
as a prepayment or incentive
under the new agreement

Whether
No Building

may be FL
Land

will be OL
ST exemption available
(Remember!
LVA exemption N.A.)
ST
exemption
not availed
Sub lease
Then

Comparing
sub-lease term with
life of ROU Asset
FA
whole lease Treat complete lease as an OL (i.e. Head lease
led the contract
Accounting for is an OL? term) & not life of
classified as Operating
Lease on DOC itself modification under Ind AS B would UA. Classify the sub
then 109 FI-Recognition & recognise lease as OL or FL &
Measurement No ROU Asset account usually
future LPs Treat complete lease as a FL End & LL

Treat CA of lessee P or L Credited

receivable asset as the
CA of PPE (asset given
on lease) and account
further as an Operating
Lease i.e.
Ind AS 109 requires to
discount the revised FCF
Depreciation on at original EIR and t/f
PPE asset gain/loss, including any
IDC if incurred by lessor
P or L Debited to P or L

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 Ind AS-116 : Leases

TRANSITIONAL PROVISIONS Example

DOC 1-4-15 “IIR/IBR of Lease LL & ROU LL & ROU Difference

Explains of Ind AS 116 1-4-2019 1-4-15 1-4-18 Op Res 2018-19
How to move from Date of Initial recognise comparitives
Date of
accounting under Ind AS Application restate
Transition
17 to Ind AS 116 (DOIA) Opening OP BS 1-4-18 IBR 1-4-19 LL & ROU LL & ROU Difference
Transitional Provision of Ind AS 116 BS Date 1-4-2018
Date 1-4-15 1-4-18 Op Res

n
recognise

DOIA 1-4-19 IBR 1-4-19 LL & ROU LL & ROU Difference No PY

io
of 116 1-4-15 1-4-19 1-4-19 Restatement
recognise Res adjust
Optional Exemption For Lessee For Lessor

at
Existing Lease contracts accounted as Continues accounting under 116
Entity-wide (for all leases single option) hence for the (prospective) Transition
Practical Expedient permitted for Lessee

uc
(Chosen Lease by Lease & not entity wise)

Contracts Contracts that have Operating Lessee by E Finance lease by E Sale & LB by E
classified as not been classified Lessee can use hindsight information
1. for determining the LT, etc. other
lease under as lease under

Ed
Prospectively accounted No need reassess on DOIA whether Hindsight lease related estimates while
Ind AS 17 Ind AS 17 Retrospective application of Ind AS 116
under Ind AS 116 ‘sale’ as per 115 was involved applying retrospective approach
Two Approaches permitted
Approach 2: Para C5 (b) If sale and LB 2. Lease contract if onerous then im-
(opt entity wise & not lease by lease)
Continue to be classified similarly accounted as Impairment pairment check may be done as per
Ind AS 37 instead of Ind AS 36.

Henceforth the accounting however to be

under Ind AS 116, subject to DOIA
adjustments discussed
Approach 1 Para C5 (a)

Full Retrospective approach

ST Modified Retrospective Approach (Para C8 explain)

Retrospectively applying
Retrospectively apply Ind
OL by E

Apply the principles

just discussed of OL
accounting by E on
FL by E

FA
As if from DOC of Lease if Ind AS
116 was applied, what would be
the value of
• R-O-U asset and
• Lease liability on
• Opening BS date, that value
will be recognized & differ-
ence adjusted from opening
reserves.
Prospectively FL
accounting
(no restatement
3.
ST leases
Lease remaining term 12 month or
less from the DOIA (1-4-19) then
lessee has option to use the ST lease
exemption
Ind AS 116, but using IBR of date on IA required)
AS 116, but using IBR of 4.
lessee on DOIA (& not DOC
lessee on DOIA Discount Use single discount rate for a portfo-
of lease)
Rate lio of leases
Any deferred gain/loss under Ind
Effect given on DOIA i.e. AS 17 on DOIA, to be adjusted
Effect given by recognizing 1-4-19 5.
LL & ROU asset on operating from ROU Asset Initial Direct Ignore IDC accounting on DOIA.
BS date 1-4-18, difference Cost
adjusted from reserves No restatement of PY
figures or opening BS date
Business Combination
P.Y. figures restated & On DOIA, any IA on operating leases with the Acquiree co.
opening BS will be Any difference of LL & ROU asset which was recognized on DOA of business, will be written of on
prepared recognized onà 1-4-19 to be DOIA of 116 and ROU asset shall be recognized on DOIA of 116.
adjusted from opening reserves on Difference adjusted from reserves.
that date.

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