BHAVIK CHOKSHI

25. IND AS 116 : LEASES

(I) LEASE
Lease is a contract that conveys the right to control the use of an identified asset for a
period of time in exchange of consideration.

Key Points
(1) Identified asset : An arrangement can contain a lease only if there is an identified asset.
An identified asset can be explicitly specified in a contract or can be (implicit based on the
terms of the contract.) An asset can be considered to be identified even if it is not yet
manufactured. The identified asset should be such that the supplier does not have a
substantive right to substitute the asset throughout the period of use.

(2) Substantive Substitution Rights

Substantive Substitution
Rights
(With Supplier)

AND
Supplier has the practical
ability to substitute
alternative assets throughout
the period of use
Supplier would benefit
economically from the
exercise of its right to
substitute i.e. there should be
an economic incentive (gain)
on substitution

a) The above evaluation should be done based on the facts at inception on the contract.
b) Mere protective rights retained by the supplier (lessor) do not create substantive
substitution right.
c) A customer (lessee) should presume that a supplier’s substitution right is not substantive
when the customer (Lessee) cannot readily determine whether the supplier has
substantive substitution right on not.
If question is silent, we assume that supplier does not have substantive substitution right
(Practical expedient) (Practical expedient means a permitted shortcut)

(Refer Q. 1, 2, 3)

146
BHAVIK CHOKSHI

(3) Identified Asset – physically distinct

An identified asset or a part thereof should be physically distinct i.e., independent in order to
be treated as an identified asset. Example: 1 Floor in building
In certain assets where we get a right to use capacity (e.g.: Broadband) there is no identified
asset unless substantially all of the capacity is used
(Student reference: Substantially 90% of total capacity)
(4) Right to control the use
[a] A customer (Lessee) has the right to control the use of an identified asset for a period of time
if, throughout the period of use the customer (Lessee) has both
 the right to obtain substantially all economic benefits from the use of the
identified asset and
 the right to direct the use of the identified asset.

KEY POINTS
1. Right to obtain substantially all economic benefits would include benefits linked to usage
either directly or indirectly by the customer (Lessee)
Economic benefits from use include:
i) Asset’s primary output (goods)
ii) Any by-products or subsidies linked to usage [and not linked to Ownership]
iii) benefits from an indirect usage (e.g.: subletting)

2. Rights to direct the use

The customer (Lessee) has the right to direct the use if substantial decisions linked to how
and what purpose, where & when the asset will be used can be taken by the customer
(Lessee)
In case the relevant decisions about how & what purpose the asset is used is pre-
determined by contractual restrictions or the design of the asset, the customer is
considered to have a right to control the use if:

i) (Customer Lessee) has a right to operate the asset direct others to operate the asset in a
manner the customer determines throughout the period of use (Supplier should not have
the right to change these operation instructions)
or
ii) the customer has designed the asset is such a way that it pre-determines how & for what
purpose the asset would be used.

Note 1: Merely Specifying the quantity required does not give the customer the right to direct
the use
Note 2: A supplier’s protective right in isolation do not prevent the customer from having the
right to direct use. (Refer Q. 7, 8, 9, 10, 11, 12, 65, 66)

147
BHAVIK CHOKSHI

(II) Separation of Lease & Non – Lease Components

(a) Multiple Lease Components in a contract e.g. Furnished Flat
The right to use each asset is considered as a separate lease component only if both the
following conditions are satisfied.

Seperation of Lease components

AND

The underlying is NOT highy

Leasee can benefit from the use of interrelated OR highly depended on
each asset other asset in the contract

Separation is mandatory in case both the above conditions are met. Practical expedient for non-
separation of non-lease component DOES NOT APPLY HERE.

(b) Separation of lease components from non-lease components

A lease may also involve an agreement to purchase other goods/services. As separation
needs to be done for their non-lease components as well & the accounting for the non-
lease components would be based on the respective IND AS to which they pertain.
Example: A car along with a driver
Optional exemption of using a practical expedient to not separate the non-
lease components is available to the lessee. If an entity elects to use this expedient,
then all the contract consideration should be allocated to the lease components.

(c) Costs relating to property taxes, administration and insurance (neither lease nor non lease
components), do not involve the transfer of any goods or services and hence if these costs
are separately payable, they should be allocated by including them in the overall contract
consideration and then allocated between the lease & non- lease components.

(d) Allocation of the consideration

Allocation should be in the ratio of standalone price for each component. In case stand alone
price is not available, an entity can estimate the standalone price by calculating the Fair Value
by maximizing the use of observable inputs.

(Refer Q. 13, 14, 15, 16, 17)

148
BHAVIK CHOKSHI

KEY TERMS
1. INCEPTION AND COMMENCEMENT DATE

Date

Commencement
Inception date date

EARLIER OF Date when the

a) Date of lease agreement
b) Date of commitment by
parties to the principal
terms
underlying asset is
made available for use
to the lessee
(irrespective of when
lease payments start)

Date when an
entity assesses if Accounting for
a contract assets/liability
contains lease or will start from
not this date

2. LEASE TERM
a. Lease-term = Non-cancellable period + Renewal option period (if reasonably
certain that renewal option will be exercised) + periods covered where there
is an option to terminate (if reasonably certain that option to terminate will
not be exercised)
b. The assessment of the additional period (renewal/termination) should be based on an
evaluation of factors that crate an economic incentive for the leasee to continue Example:
- Premium location of the underlying asset, incurring of significant leasehold
improvements & a below market lease rent in the optional period will create a significant
economic incentive.

149
BHAVIK CHOKSHI

c.

Termination
option

Option with With the With the

both parties lessee only lessor only

INCLUDE the period Include the period

Period after the under termination if
termination option will after the
lessee has economic termination option
not be included in the incentive to continue
lease term. {Assuming in the lease term
(i.e. not terminate) & {as lessee has an
that there is an EXCLUDE in case lessee
insignificant obligation to make
has no economic payments}
termination penalty } incentive to continue

d. Re-assessment of lease term

An entity is required to reassess the lease –term upon occurrence of a significant event or
there is significant change in circumstances.
Example :- lessee subsequently constructing significant leasehold improvements, making a
business decision that directly affects the usage like tie-ups & sub-letting.

(Refer Q. 18, 19, 20, 23, 24)

(3) Lease Payments
Lease payments are payments made by the lessee to the lessor relating to the right to use an
underlying asset during the lease term.

Lease Payments
INCLUDE
a) Fixed payments {including in-substance fixed payments} (-) lease incentives
b) Variable lease payments that depend on Index or rate (Inflation index / Interest rate)
c) Exercise price of a purchase option if the lessee is reasonably certain to exercise the
option
d) Payments of penalties for terminating the lease if it is reasonably certain
that termination option will be exercised.
e) For the lessee, payments which are expected to be made under residual value guarantee.

EXCLUDE
i) Payments allocable to the non-lease components (assuming practical expedient-not
taken)
ii) Variable lease payments that do not depend on index or rate.

150
BHAVIK CHOKSHI

KEY POINTS:
1) Fixed payments refer to a determinable amount to be paid which may/may not be equal
each year. Example:- payments of 100,110,120 over 3 years are treated as fixed payments.
2) In-Substance fixed payments – are payments which in form contain variability but are
in- substance unavoidable. Example:- If a lessee has to make payment out of a set-of realistic
possible payments, then the lowest realistic amount if determinable is in-substance a fixed
payment.
3) Lease Incentives – are payments made by the lessor to the lessee. Example:- Signing
bonus These payments reduce the cash outflow for lessee and hence should be deducted.
4) Variable Payments

Variable payments

Linked to Index Not linked to

OR Rate Index OR Rate

An index (like consumer price example:

index) or a rate (LIBOR) help Payments as a %
to reflect the change in the of sale or based on
rental based on the passage of number of units
time produced

INCLUDE these variable lease NOT INCLUDED in the

payments based on the ROU Asset/Lease
rate/index prevailing on the liability calculation.
commencement date @ initial
recognition

Expenses
These payments will be recognized in P/L
remeasured when there as & when they
is change in cash flows are incurred
(Based on the revised
rate / index)

In case variability is resolved during the

i.e. when the rent is reset based
on revised index / rate, all
future lease payments will also
be reassessed based on revised
rate / index
lease term & payments become fixed for
the remaining lease term, then there
fixed payments should subsequently be
considered in the ROU asset/lease
liability measurement

151
BHAVIK CHOKSHI

5) Residual Value guarantee – this is a guarantee given to the lessor that the underlying asset
at the end of the lease term will be worth at least the specified amount.

In case there is an expected residual value of the asset at the end of the lease term, then the
payments to be made under a residual value guarantee would be guarantee amount – expected
residual Value

If the guarantee is given by the lessee, it should be included in the lease payment to be made by
the lessee as well as the lease receipts by the lessor. However, in case guarantee is given by an
independent third party (Other than the lessee), then such payments would not be included by
the lessee. However, the lessor would include them in his receipts.

The above is a general interpretation of Residual Value Guarantee. An alternative interpretation

is also possible based on the facts given in the question.

(Refer Q. 21, 22, 25, 26, 27, 28, 29, 30, 31, 67)

5) Initial direct costs (IDC)

IDC are defined as incremental cost of obtaining a lease that would not have been incurred if
the lease had not been obtained.
example: Commission, legal fees for the execution of lease, payments to existing tenants to
moved out etc
Items excluded from IDC:
Travelling expenses, advertising, legal fees for services rendered before execution of lease.

6) Discount rate
This is a rate used to find the present value of lease payments. Discount rate should be:
i) Interest rate implicit in the lease (lessor’s IRR)
ii) If the above is not determinable, then the lessee’s incremental borrowing rate

Lessor’s IRR can be calculated as the rate at which the present value of the cash outflows of lessor
(fair value + IDC incurred by him)

= PV of cash inflows i.e [lease payments + the unguaranteed residual value (UGRV) = Expected
residual value – guaranteed residual value (if positive)

(III) Recognition-exemptions (for lessee)

Generally, a leasee needs to create a ROU asset with a corresponding lease liability for
arrangements that contain a lease. However, a lessee has an option to claim an exemption from
the above treatment and instead recognize lease payments directly as rental expenses in the profit
& loss either on a straight-line basis or any other systematic basis if available (i.e. similar to
accounting under operating leases)

152
BHAVIK CHOKSHI

In such cases, ROU asset and lease liability are not created.

Recognition –
exemptions (Optional)

Short term leases Lease of low value items

Low value assets have

A lease with a lease term not been specifically
less than or equal to 12 defined
months from the
commencement date + (Note - 1)
No Purchase option

The following cannot be treated as

Choice to be exercised for
class of underlying assets
taken on short-term lease
[and not lease by lease]
low value items
(a) Assets which are highly
interrelated /highly inter-
dependent with other assets e.g.:
A tyre is highly interrelated with
the car, but a laptop/mobile is
generally independent

Example - We can take the

recognition exemption for all
items, furniture taken on short-
term lease, however continue to
apply the ROU asset recognition
for building with a lease term of
less than or equal to 12 months
(b) Head-leases
The choice needs to be taken on a
lease by lease basis [and not for an
entire class]

Note 1 - An item can be considered as low value if it is a low value item as a new asset (irrespective
of whether we have taken a new asset or an old asset). Typically office equipment like Telephones,
Printers, Laptops etc. can be considered as Low value items whereas Cars, Buildings etc. will not
be classified as low value items. If nothing is given in the question, we do not assume the item to
be Low value.
(Refer Q. 32)

153
BHAVIK CHOKSHI

(IV) ACCOUNTING IN BOOKS OF LEASEE

A. Initial Recognition

Lease

Short term
lease/low value
item leased [where All other cases
optional exemption
taken]

ROU Asset A/c Dr. XX

Rent expense (P/L) A/c Dr. XX
To Bank A/c
[No ROU Asset/Lease liability]
(Non Current Asset)
XX
To Leased Liability A/c XX

Note 1 : Measurement of Lease liability

Lease liability is measured to the present value of a future lease payments (as defined earlier) to
be made under the lease term (as defined earlier) discounted at the interest rate implicit in the
lease.
Subsequently, the lease liability would change due to
a) Interest
b) Lease payments
c) Impact of re-assessment/lease modification
The subsequent accounting for lease liability would be similar to the accounting for financial
liabilities on an amortized cost basis

Note 2: Measurement of ROU Asset

ROU Asset to be initially measured @ cost i.e.
Initial lease liability XX
(+) Payments made before-commencement date XX
(-) Lease incentives received before commencement date (XX)
(+) Initial Direct Cost (IDC) incurred by lessee XX
(+) PV site restoration/de-commissioning obligations XX
INITITAL COST (ROU ASSET) XXX

154
BHAVIK CHOKSHI

B. Subsequent recognition
Unless given, we would assume that cost model, is applied for subsequent recognition
Initial cost XX
(-) Accumulated depreciation (XX)
(-) Impairment (XX)
Carrying value XXX
(+) Adjustment for XX
re-measurement of lease liability
[due to reassessment/modification]
Adjusted carrying value XXX

Depreciation of the ROU Asset will generally be over the lease term. However, in case there is a
purchase option which is expected to be exercised by the lessee, then the asset would continue with
the lessee for the entire useful life & hence in such cases, ROU Asset would be depreciated over the
entire useful life.

Special Case
In case, leases are denominated in foreign currency, the ROU asset (non-monetary) will be shown
at the historic rate whereas the lease liability which reflects a determinable amount of cash
payments (monetary items) will be shown at closing rate with Forex Gain/Losses taken to the P/L

(Refer Q. 33, 34, 35, 36, 37, 54, 55)

(V) Lessor Accounting

The accounting for lessor under IND AS 116 is broadly similar to the accounting under IND AS
17/AS 19. At inception of the lease, lessors need to classify the lease as follows

155
BHAVIK CHOKSHI

Lease Classification

Finance lease Operating lease

Lease where
substantially all risks &
rewards incidental to
the ownership of the
asset are transferred to
lessee.
Every lease other than a
finance lease is an operating
lease [i.e risks & rewards
incidental to ownership - not
transfer to the lessee]

Finance lease
Following factors result in a finance lease
a. Ownership: Automatic transfer of ownership at their end of lease term (e.g.: Hire
Purchase)
b. Purchase Option: Available to the lessee at a price which is substantially lower than the
expected market price
c. Lease-term: Major part of economic life (>75% )
d. PV of minimum lease payments:
Substantially covers the fair value of the asset (> 90%)
e. Specialized nature: Only the lessee can use it and it cannot be used by others without a
major modification
In case, any of the above gets satisfied, the classification is finance lease and if all of them are not
satisfied, the classification is an operating lease.

Accounting in the books of lessor

Particulars Operating lease Finance lease
1) Initial No entry Lease receivable A/c Dr. XX
(Note 1)
Loss (P/L) Dr. XX
To Asset A/c XX
2) Annual Bank A/c Dr. XX Bank A/c Dr. XX
Deferred Rent Dr. XX To Finance Income XX
To Rent income XX To Lease Rec. xx
(Note2)

156
BHAVIK CHOKSHI

Note 1: the lease receivable should be recorded at the Net Investment in the lease.
a) Gross investment = Lease payments receivable + Unguaranteed residual value (UGRV)
b) Net investment = Present value of gross investment i.e present value of lease payments
+ Present Value of UGRV
c) Unearned Finance Income = Gross Investment – Net Investment
d) UGRV = Expected residual value – Guaranteed residual value

Note 2: Straight lining (SL) of lease rent in case of operating leases, lease rent should be
recorded on a S.L.M. basis unless another systematic basis is more representative.

Example: A 4-year lease has the following rentals:

Years Rentals
1 10,000
2 20,000
3 30,000
4 40,000

In absence of a systematic basis, lease rent income p.a = 10 + 20 + 30 + 40 / 4 = 25,000 p.a. i.e.
YR 1 YR2
Bank A/c Dr. 10 20
Deferred Rent A/c Dr. 15 5

To Rent Income 25 25
YR 3 YR4
Bank A/c Dr. 30 40
To Rent Income 25 25
To Deferred Rent 15
5

The above treatment needs to the done in case there was no systematic basis. Instead, in case
the higher rents were linked to more area, then there was no straight lining required.

Note 3: Manufacturer/Dealer lessor

In this case, revenue should be recorded based on the lower of fair value of the asset or the present
value of lease payments (excluding UGRV).
The COGS would be calculated as the cost. (Cost – PV of UGRV)

The difference will be shown as selling profit (Gross profit) The Presentation of profit on sale of
inventory is generally presented by showing the revenue & COGS separately & hence the above
numbers need to be calculated

Any initial direct cost incurred by a manufacturer /dealer lessor is to be expensed to P/L
immediately as it is attributable to sale. (Not lease)

157
BHAVIK CHOKSHI

In line with the ICAI solutions, the Following entry needs to be passed:
Lease Receivable a/c (Net Investment) Dr. xx
COGS a/c (Cost – PV of UGRV) Dr xx
To Asset (Cost/Carrying Value) xx
To Sales (Net Investment– PV of UGRV) xx

(Refer Q. 38, 64)

(VI) Special Cases
(A) SUB – LEASE: Sub-lease is defined as a transaction for which an underlying asset is re-
leased by a lessee to a third party
Example
ORIGINAL LESSOR
HEAD LEASE

ORIGINAL LESSEE /INTERMEDIATE LESSOR

SUB LEASE
2

SUB LESSEE

KEY POINTS
a. While assessing the sub-lease as an operating or financing lease, we will compare the lease
term with the remaining life of the ROU Asset (remaining original lease term) and not
life of the underlying asset
b. When the head lease is a short-term lease, the sub-lease is always classified as operating
lease.
c. An intermediate lessor cannot account for the head lease as a lease of low value item
(irrespective of the value of the item) i.e., optional recognition exemption not available

158
BHAVIK CHOKSHI

Accounting

Sub-Lease is finance Sub-Lease is an

lease operating lease

Lease receivable A/c Dr. XX

No entry at the time
(Net Investment) of sub- lease { ROU
To ROU Asset XX Asset & Lease liability
both continue to be
To Gain (P/L) XX recognized}
{original lease liability is not
derecognized}

(Refer Q. 39, 40, 41)

(A) SALE & LEASE BACK
This involves the transfer of an asset by one entity to another and the lease back of the same
asset to the original entity. Generally, this transaction is done in order to generate
immediate cash.

Sale & lease back

Control is Control is not

transferred (IND transferred
AS 115)

Accounted as a Accounted as a
sale loan

Bank A/c Dr. XX

Derecognize
underlying asset & To loan XX
record gain/loss [Asset not derecognized &
(proportionate) no gain/loss recorded]

Unless given, we assume that control is transferred and hence sale can be accounted

159
BHAVIK CHOKSHI

In case the sale is happening at off market terms, then an adjustment will have to be made for
a) The difference between fair value & sale price or
b) The difference between present value of contractual lease payments and the present
value of fair lease payments. WHICHEVER IS more readily determinable

Sale /Leaseback at off

market terms

SP > FV SP < FV
(Alternative: PV of Actual (Alternative: PV of Actual
Rent > Rent <
PV of market rent) PV of market rent)

Hidden Loan (financing) Hidden pre-paid rent/lease

payment

Increase the sale price by

Reduce the sale price by the prepaid element with
loan element the corresponding
adjustment to
the ROU Asset

Steps:-
(1) Find the off-market element (generally SP - FV)
(2) Find PV of agreed lease payments
(3) Find PV of dedicated lease payments
= PV of agreed lease payments +/- off market element (Deduct loan , Add Prepaid)
(4) ROU Asset to be shown at the proportionate carrying value i.e
= WDV × PV of dedicated lease payments / Fair Value
(This will give the Ledger balance proportionate to the rights)
(5) Gain/Loss to be recorded only to the extent of rights transferred i.e.

160
BHAVIK CHOKSHI

Gain on sale
(FV-WDV)

Rights retained Rights transferred

Gain × PV of dedicated lease payments Balancing figure =

Fair Value Gain Recognised

(6) In case subsequent year accounting is to be done, split the annual lease between the
financing & lease elements.

(Refer Q. 42)

VIII. LEASE MODIFICATION – LESSEE

1. A modification is negotiated after lease commencement & can involve:
1) Change in consideration (Rent)
2) Change in tenure (Lease term)
3) Change in scope (Area)

2. A modification can be accounted as a separate lease if,

i) An additional right of use is obtained. (e.g.: more area) and
ii) The additional right of use is commensurate with its stand-alone selling price
(reasonable discounts permitted)
In case, the above conditions are satisfied, the modification would be accounted as a
separate lease with a separate ROU asset & lease liability. The existing lease accounting
will not be altered.

3. In case any / both of above conditions are not satisfied, the accounting will be as follows
(in books of lessee)

161
BHAVIK CHOKSHI

MODIFICATION
(No separate lease
created)

1) Change [Increase/Decrease] in
consideration 1) Decrease in lease term
or or
2) Increase in lease term 2) Decrease in Scope
or
3) Increase in scope (Not at stand -
alone price)
i) De-recognize proportionately
the lease liability & ROU
asset.
Remeasure lease liability at ii) Recognize gain/loss on
modification date with termination in the P/L
corresponding adjustment to
ROU asset

Based on discount rate on Date of Modification

Steps in case of lease modification

1. Find lease liability on commencement date and on modification date. (can prepare table
(ICAI method) as directly use PVAF)

2. Find ROU Asset at start (commencement date) and modification date (using SLM
depreciation – if nothing is given).
(This step is needed only if there is either decrease in lease term (Q46) or decrease in scope
(Q48))

3. a) Find proportionate ROU asset and proportionate lease liability to be de- recognised
(This is step is needed only if there is either decrease in lease term or decrease in scope)
b) Pass Journal entry with balancing figure taken to profit and loss.

4. Revised lease liability: PV of revised rent for the revised remaining lease term discounted at
the rate on the modification date.

5. Revised lease liability: Ledger balance of lease liability will be adjusted with corresponding
effect in ROU asset. Profit and loss not impacted.

(Refer Q. 44, 45, 46, 47, 48)

162
BHAVIK CHOKSHI

IX. RE-MEASUREMENT
Re-measurement can arise due to change in the lease measurement (other than lease
modification) due to any of the following factors

Re-Measurements

Factor 1
1)- Re-assessment of lease
term (Renewal/Termination
option)
2)- Re-assessment of purchase
option (whether to be
exercised or not)
Factor -2
1)- In-substance fixed lease
payments
2)- Future lease –payments from a
change in index/rate
3)- Expected payable amounts
under residual value guarantees

REVISED DISCOUNT RATE Continue with original

(At remeasurement date) discount rate

If remeasurement is due to some changes in Factor – 1 and Factor - 2 both, we take revised
discount rate.

(Refer Q. 43)

163
BHAVIK CHOKSHI

X. Lease modifications (Covid – 19)

Is rent concession a direct consequence of the COVID – 19

pandemic?

Is the revised consideration for the lease substaintially the

same as, or less than, the consideration for the lease
immediately preceding the change?

Does the rent concession affects only lease payments

originally due on or before 30 June 2022?

No substantive changes to the other terms and conditions of

the lease?

Practical expedient applicable

Practical expedient – The amendment permits lessees, as a practical expedient, not to assess
whether rent concessions that occur as a direct consequence of COVID-19 pandemic and meet
specified conditions are lease modifications and, instead, to account for those rent concessions as
if they were not lease modifications.
The amendments do not affect lessors. Lessors are required to continue to assess if the rent
concessions are lease modifications and account for them accordingly.
Key Points
1. Practical Expedient cannot be applied in case the revised consideration increases (after time
value adjustments) due to lease renegotiation
2. Benefits (concessions/waivers) need to be restricted upto 30th June 2022 in order to avail
practical expedient. Additional cost due to recovery of rents waived off (deferral) can extend
beyond 30th June 2022
3. Increase in lease term corresponding to period of rent concessions/deferral is not
considered to be substantive changes to the other terms

164
BHAVIK CHOKSHI

Lease Modification
(COVID- 19) (Lessee)

Practical expedient taken Other Cases

1. Revised lease liability: Interest Lease modification guidance

rate on Commencement date applies: Revised lease liabiliity
2. Adjustment : will be based on the Interest rate
Difference in existing and revised on modification date.
lease liability

Through profit and loss

(Negative variable lease
Adjutments will be made
payment)
through ROU Asset and hence
(ROU Asset :- Unchanged
future depreciation changes
Future depreciation : No effect)

(Refer Q. 47, 50, 51, 52, 53, 54, 55, 56, 57, 58, 59)

165
BHAVIK CHOKSHI

XI. Lease modifications - Books of Lessor (Covid – 19 or otherwise)

Lease Modification (from lessor's perspective)

(change in scope / term/ consideration)
(Practical expedient for COVID - 19 rent concession not applicable to
lessors)

Else :
IF: Treated as
1) Additional right of use modification of
(eg: more area) existing lease
+
For existing
2) At ststandalone price For existing operating
finance lease leases

SEPERATE 1. Treat as
LEASE termination of
Check that if modified terms were existing lease and
applicable at lease inception, will the
lease still continue to be classified as start of a new
finance lease lease
2. Find the revised
rent p.a. for the
future years after
No. including existing
Yes.
(If would have deferred rent if
(still continued as
finance lease ) been operating any
lease)

Remeasure lease 1. Treat as termination of

receiveble (based existing lease and create
on revised term) new lease
+
2. Underlying Asset =
Lease Receiveble

(Refer Q. 60, 61, 62)

166
BHAVIK CHOKSHI

XII. TRANSITION APPROACHES

(1) An entity is not required to assess separately whether an arrangement contains a lease or
not.
(2) In case of finance leases, the carrying value of the asset would be taken as the carrying
value of ROU Asset and carrying value of liability would be taken as the carrying value of
lease liability

In case of operating leases, the following 3 possibilities exist.

TRANSITION
APPROACHES

FULL MODIFIED
RETROSPECTIVE RETROSPECTIVE

Considering IND AS 116 ALTERNATIVE 1 ALTERNATIVE 2

was always applicable
[Discount rate to be the
rate on commencement
date]
Restrospective
restatement from earliest
reporting date
i) Adjustment from
i)Adjustment from
1/4/2019 1/4/2019
ii) Lease liability = PV ii)Lease liability =
of remaining lease ROU Asset = PV of
remaining lease
payments payments [Based on
iii) ROU Asset to be discount rate as on
retrospectively valued 01.04.19]
considering discount iii)No prior period re-
statement
rate on 1/4/2019
iv) No period perlod re-
statement

(Refer Q. 63)

167