By:

Priyesh Agarwal (PRN: 190 209 420 25)

Lakshta Khushlani (PRN: 190 209 420 26)
Ananya Malhotra (PRN: 190 209 420 27)
Shrey Nagle (PRN: 190 209 420 28)
Vibhuti (PRN: 190 209 420 29)
Akhil Khandelwal (PRN: 190 209 420 30)
IND AS-116: A New Era of Lease Accounting

FASB, IASB, ICAI have embarked on ushering

1 in a new era of lease accounting.

New leasing standards are expected to bring

2 about a paradigm shift in the accounting and
recognition of leases by lessees.

3 Corresponds to IFRS 16.

 IND AS-116
• (Ministry of Corporate Affairs, 2019). The Ministry of Corporate Affairs (MCA) notified Ind AS
116, the new leases accounting standard on 30th March 2019 with the effective date of its
application from 1st April 2019. Ind AS-116 replaced the current guidance in Ind AS-17,
‘Leases’.
• Ind AS 116 defines a lease as a contract, or part of a contract , that conveys the right to use an
asset (the underlying asset) for a period of time in exchange for consideration.
• Under Ind AS 116 lessees have to recognize a lease liability reflecting future lease payments
and a ‘right-of-use asset’ for almost all lease contracts. This is a significant change compared
to Ind AS 17, under which lessees were required to make a distinction between a finance lease
(on balance sheet) and an operating lease (off balance sheet). Ind AS 116 gives lessees
optional exemptions for certain short-term leases and leases of low-value assets.
 IND AS-116

• The accounting by lessors will not significantly change. As under Ind AS 17, the lessor will
continue to classify leases as either finance or operating, depending on whether substantially
all of the risks and rewards incidental to ownership of the underlying asset have been
transferred.
• Ind AS 116 adds significant new, enhanced disclosure requirements for both lessors and
lessees.
• On transition, lessees can choose between full retrospective application or a simplified
approach that includes certain reliefs and does not require a restatement of comparatives. In
addition, as a practical expedient entities are not required to reassess whether a contract is,
or contains, a lease at the date of initial application (that is, such contracts are
‘grandfathered’).
 Key Impacts of IND AS-116
• (BloombergQuint, 2019). 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.
• Foreign currency leases will increase P&L volatility due to a restatement of foreign
currency liability.
• Significant KPIs such as debt-equity ratio, EBITDA and return on capital employed
(ROCE) will be affected.
• Lessor accounting is substantially unchanged.
• Ind AS 116 requires lessees to recognize a ‘right-of-use asset’ and a ‘lease liability’
for almost all of the leasing arrangements.
Impact of IND AS-116 on Financial Statements of Lessee

(Ernst & Young, 2019)

 Example

(Ernst & Young, 2019). An airline company enters into a contract with an airport operator for
using space in the city airport. The airline company will use this space to deploy its check-in
machines and other equipment. As per the contract, the airline operator will provide a
particular area of space and the space must be located within the entrance hall. However, the
operator has a right to change the allocated location at any time during the contract. The
entrance hall of the airport has several unoccupied places that will meet the airline company’s
requirements. The airport operator needs to incur minimal costs for changing the allocated
space. The airport operator will economically benefit by changing the space allocated to a
customer.
 Evaluation

The arrangement does not contain a lease. While the contract specifies the area allocated to the
airline company, the fulfilment of the arrangement does not depend on the use of an identified
space. The airport operator has a right to substitute the allocated space and this right is
substantive because the operator also has a practical ability to change the allocated space. The
entrance hall of the airport has several unoccupied places which will meet the airline company’s
requirements and the operator can change the space at any time without the airline company’s
approval. Also, the operator will benefit economically by substituting the space. The airport
operator needs to incur minimal costs for changing the allocated space. However, if the airport
operator did not have a substantive right/practical ability to substitute the allocated space, then
the fulfilment of the arrangement will depend on the use of an identified space. In this scenario,
the arrangement is likely to contain a lease.
 How it is Seen

Determining when a customer has the right to direct the use of an identified asset may require
significant judgement, particularly for arrangements that include significant services. While the
new standard provides new criteria for determining whether an arrangement meets the
definition of a lease, we expect that entities generally will reach similar conclusions as they do
today
 Off- Balance Sheet (OBS) Items
• Also known as Off-Balance sheet items, Off-Balance sheet assets or liabilities,
and Incognito Leverage. They are either a liability or an asset which are not shown
on a company’s balance sheet as the business is not a legal owner of the respective
item.
• Off-Balance sheet items are generally shown in the notes to accounts along with
the financial statements. These assets and liabilities may be used by a company;
however, the legal ownership may or may not belong to them. In this case, the
consumption of assets and payment of liabilities may ultimately be an indirect
responsibility.
• The term is very common with asset management companies, brokerage firms,
wealth managers, etc. In this case, the assets being managed by firms do not belong
to them but to the clients, so they are not recorded on the balance sheet.
Key Sectors Impacted by Ind AS 116 Implementation
 References
BloombergQuint. (2019). Ind AS 116: No More Off-Balance Sheet Treatment Of Leases.
Available at: https://www.bloombergquint.com/opinion/ind-as-116-no-more-off-balance-sheet-treatment-of-
leases

Edelweiss Research. (2019). Ind AS 116: Dimming the light on asset lite models.
Available at: https://www.edelresearch.com/showreportpdf-43079/IND_AS_116_-_APR-19-EDEL

Ernst & Young. 2019. Transitioning to new leasing standard: Ind AS 116.
Available at: https://www.ey.com/Publication/vwLUAssets/ey-transitioning-to-new-leasing-standard-ind-as-
116/%24File/ey-transitioning-to-new-leasing-standard-ind-as-116.pdf

Ernst & Young. 2019. Ind AS 116 Leases: Impact analysis for the airline industry.
Available at: https://www.ey.com/Publication/vwLUAssets/ey-ind-as-116-leases/$File/ey-ind-as-116-leases.pdf

Ministry of Corporate Affairs. (2019). Ind AS 116: Leases.

Available at: http://mca.gov.in/Ministry/pdf/RuleIndAsEng_30032019.pdf