DroneCharts IndAS 116 ca final fr sj.pdf

DroneCharts IndAS 116 ca final fr sj.pdf

1. Definition of Lease
Lease
contract
NLC - Non Lease
components
IR
SM
RoU Asset
Finance Lease Ind AS 16/38/41
Ind AS 115
Operating Lease Ind AS 21/23
etc.
Special Issue
(Ind AS 109)
Lease liability
Includes
Reassessment &
Modifications
Scope, Exclusions &
exemptions
Short
Term
Lease
Low
Value
Assets
LC - Lease
components
[A2]
Right to control
the use of
[A2]
Right to control the use
Date of inception (DOI)
(Identification of Lease)
Earlier of
(a) Date of lease agreement
(b) Date when parties principally agree t
o the
items of lease
Relevant to assess whether contract involves a lease
Date when the asset is made available for use by the lessee
Relevant for all other pur- pose including recognizing the Right Of Use Asset & Lease Liability
[A1]
an identifiable
asset
then it will be a lease &
not just a contract to ac-
quire goods & services.
[A3]
for a period of
time
[A4]
in exchange of a
consideration
[A5]
part of contract
[A6]
Lessee accounting
[A7]
Lease accounting
Explicitly identified in the contract
or implied
If supplier's right to
substitute is only after
a period of time/only
on fulfillment of a con-
dition, then assume
no SSR.
What happens when only a
part or a portion capacity of
assets is provided to customer
for use
Treat asset to be an
identifiable asset (IA) only if
Physically Distinct
Lessor has no (SSR) (substantial substitution rights)
R is said to have a SSR if:
Generalisation to establish whether supplier has SSR:
(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
(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
then he can prescribe that the suppliers ‘SSR’ do not exist
(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.
Practical ability to
substitute the asset
throughout the period
of use ( ) &
Supplier has economic
benefits through substitution
(Benefits expected from subs.
> Costs of subs. for supplier)
Not an IA unless the capacity given to
customer represents substantially the
whole capacity.
Else
that conveys the:
orA B C D E F G
Lessee Accounting Lessor Accounting Sale & Lease Back
Sub leases (Head
lease & lease)
Transitional
Provisions
Impact on other
standards
Presentation & Dis-
closure
Background
Identifying whether contract contains
a lease?
A Contract or (part of c ontract) conveys
A1 - DOI
of an identifiable
asset
A2 - DOI
Right to control
the use
A3- for a pe-
riod of time
A4 - in
exchange for
consideration
&
[A1] Identifiable assetSJ Tips
Identifying whether contract is a lease
Date of Commencement (DOC)
(Accounting for Lease)
SJ's Drone View

2. Ind AS-116 : Leases
Use of asset
Use by
customer
or by
subleasing
to others or
outsource
Ownership related
benefits even if not
with customer it still
has right to control,
if it has right to
obtain – SAEB from
use of asset
OR
Right to Obtain – SAEB
(within the scope of rights
given in contract)
Right to obtain
substantially all
economic benefits [SAEB]
from the “use of asset”
Use of asset
Will be with the customer if he has right to take decisions about
Economic benefits
Direct or Indirect
RTD Right to Direct
Protective Rights
(of suppliers)
Rights kept with
supplier either to
protect his interest or
to comply L & R are
protective rights and
hence do not interfere
with the RTD – use of
asset.
They just define
the scope of
contract.
T
Type of
output
W
When to
produce
W
Where to
produce
W
Whether
& what
quality to
produce
who functionally
operates &
maintains the
asset is not the
basis of
determining who
has the RTD the
use of asset
If the uses of assets are predetermined
(scope of contract defines it uses)
[A2] Right to control the use
[A3] LEASE TERM (LT)
an identifiable
asset
right to control
the use of
for a period of time
(LEASE TERM)
[A1] [A2] [A3] [A4]
in exchange for
a consideration
Lease : Contract (part of contract) that conveys the
Defined in terms of Time or Usage
Also depends on the provisions of Contract Act.
LT = Non-cancellable (NC) period of lease (subject to discussion on
termination/extension option in lease agreement).
1
2
3
4 Situations relating to NC/Cancellable Lease Term (LT)
Right to take decision usually if customer can decide

3. This will affect the LT if entity/lease is reasonably
certain to exercise/not exercise the renewal/
termination option
Factors affect decision to exercise/not exercise an
option:
1. Factor as existing on DOI are to be seen (
future unplanned or
unanticipa
ted events
term )
Potential new customers, new technology
may get developed, alternate use of asset,
significance, difference in market value etc.
2. Factors will influence the lessee’s decision to
extend the lease term:
a) Contractual terms Renewal option price,
Renewal period, etc.
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.
When E exer- cises or lapses the extention/ termination option against originally intended.
Significant event/
changes that affect
the E’s option to
exercise/terminate
the LT
Example.
Legal
restriction
on using UA
Renewal/Termination options
Lease Term - Reassessed /Revision significant
OR
Eg.1: LP 10L p.a. provided asset is operational
In substance
FLPs
Eg.2: LP 2L p.m.
or 5% of turnover
whichever is higher
2L p.m. is FLP in
substance being the
minimum LPs under
the contract
Eg.3: LP 2L p.m. or
5% of turnover of
E, which is lower.
Past experience,
turnover is 50L p.m.
FLPs in
substance is NIL
[A4] Lease Payments (LP) [A3] LEASE TERM
5 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.
Lease Term starts from DOC and also includes any initial rent free period when the asset is available for use.6
Generalisation for opting for the extention option
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

4. [A5] Contracts involve multiple LCs or LCs & Non-LCs & Portfolio Based Application or
Combining Contracts Combining agreement Seggregating Components
LPs agreed in agreement to be determined
based on certain outcomes:
B. Variable
LPS :
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
As per decision on Lease Term, the price of renewal option/term option will be included/excluded from LPs.
• Taxes
Property Tax payable by
“E to R” then it is included in LPs as
E paying R under lease agreement
against the RTU of asset
• GST on LRS:
ICAI clarified that GST is
not a liability of ‘R’ like property
tax, rather liability of ‘E’ which is to
be discharged on his behalf by R to
govt.
Hence R’s collection of GST on LPs
is not included in LPs as it does not
represents payment against RTU the
asset but merely discharge of E’s
statutory liability.
E. Renewal/Termination Option
D. Purchase option
C. Residual Value Guarantee
E guarantees any value at end of LT as a consider
ation 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
E.g. Furnished office
taken of lease
E.g. Flat with club
membership on lease
LC + LC LC + NLC
If contract involves no separate g/s being supplied then it is not regarded as a separate NLC of the lease
Eg. Administrative or maintenance services provided by lessor
Eg. Paying taxes etc.
LC1+LC2 +NLC
Eg. Furnished flat with club
membership
Accounting: Based on Standalone
prices (if not av
ailable maximise, the
use of observable inputs) to be the basis for seggregating LPs into LCs/NLCs. LC accounted in 116, NLC accounted in respective Ind AS.
Date of Inception
SJ says
*Lease components of multiple identifiable assets represents separate LC if and only if the lessee can:
* Lessee has entered into 2 or more lease agreements/ contracts can it be combined as one lease agreement?
Combining Agreements & Portfolio Applications
Combining contracts
Portfolio Application (E.g. Indigo – Boeing 737)
&
If entity regularly enters into contract for lease of identifiable assets that are similar in nature, then it should account them separately unless accounting the mas a single portfolio with not give results materially different from accounting them individually. In such cases common estimates for every contract in a portfolio can be taken.
&
OR OR
Combined if
Lessor: Seggregation of
LPs based on standalone price or observable market inputs to be used on date of inception
of contract as per Ind AS 115 principles
PE:
Available in con-
tract that involves single LC and one or more NLCs
[A4] Lease Payments (LP) (contd...)

5. [A6] Accounting for Lessee
Example
Journal Entry for first 4 years
W.N.3 : ‘Right-of-use’ Asset
Solution
W.N.2
LPs 10,000 p.a. (end of year)
LT 4 years
Life of underlying asse
t
10 years
The asset will be tr
ansferred to ‘E’ after end of LT
provided LPs are not due.
Implicit Interest Rate of Lease
10% p.a.
W.N.S: PV of LPs disc. at ITR (IIR) Year
LPs D.F. 10% PV
1 10,000 0.909 -
2 10,000 0.826 -
3 10,000 0.751 -
4 10,000 0.683 -
EPV of LPs =31699 or 31700 approx
Lease Liability (LL) {Amortisation T
able}
Year
OP+ Interest (10%)- LPs= Balance
I 31,700 3,170 10,000 24,870
II 24,870 2,487 10,000 17,357
III 17,357 1,735 10,000 9,092
IV 9,092 908* 10,000 NIL
*909 rounded to 908
I.R. on DOC = Initial Recognition value of LL = 31,700
Depr
eciation p.a. = Cost – RV 31,700 – 0=
10 years life
= 3,170
(assuming SLM & RV is NIL)
Year I Year II Year III Year IV
1. R-O-U Asset Dr. 31,700 x x x
To LL 31,700 x x x
2. Interest Expense Dr. 3170 2487 1735 908
To LL 3170 2487 1735 908
3. LL Dr. 10,000 10,000 10,000 10,000
To Bank 10,000 10,000 10,000 10,000
4. Depreciation Dr. 3170 3170 3170 3170
To R-O-U Asset 3170 3170 3170 3170
5. Profit & Loss Dr. 6340 5657 4905 4078
To Interest 3170 2487 1735 908
To Depreciation 3170 3170 3170 3170
1. Recognised on DOC 2. Initial value of Lease Liability =
PV of Lease payments that are
pending payments on DOC (IR)
3.
PV
Discount factor Discount factor is the implicit
interest rate. If not available
then the incremental
borrowing rate for the lessee.
4. IRR Calculated from ‘R’ viewpoint
IRR is a rate which equals:
P
V of (LPs + RV
to lessor
(unguaranteed))
Fair value
of asset
for users
= Initial
direct cost
of lessor
+ Accounting for lessee L1: Lease Liability: IR: Book of Lessee
Accounting of ‘LL’ Accounting of ROU Asset L
L.1 R.1 L.2 R.2
R
Example:
Aircraft FV to lessor 50 crores
Initial br
okerage on purchase
2 crores borne by ‘R’ LP
s Fixed LP20 crores p.a.
(arrears), 3 years + Guaranteed RV by lessee
1 crores
+ UGRV expected by lessor
additional
1.5 crores
Solution:
Accounting books of lessee
W.N.1: IR,
PV of 20 crores for 3 years + 1 crore after
= FV of Asset / 50 crores + R’s 1DC 2 crores
= 20 x AF 3 year x% + 2.5 x PV 3rd x% = 50 + 2
= 52 = 20 x AF 3 year x% + 2.5 x PV 3rd x%
Using Interpolation: Say x is 10% p.a., RHS
20 x 2.4869 + 2.5 0.7513
49.73 + 1.88 = 51.60
x is 9% p.a., RHS 50.63 + 1.93 = 52.56
x % = LR + V
LR – VD x (HR – LR)
=9% + 52.56 – 52
52.56 – 51.60
x (10 – 9)%
= 9.58%, say 9.6% p.a.
V
LR - VHR
+ 1.5 crores
after 3 year
s
(UGRV)
3 years
(LPs)

6. Lessee L.2: Subsequent Measurement of LL
IR LL 20 x AF
3
+ 1 x PV
3rd

= 50.85
9.6% 9.6%
SM LL
Year Op. Interest 9.6% LPs Balance
I 50.85 4.88 20 35.73
II 35.73 3.43 20 19.16
III 19.16 1.84 20 1
= 1.15 (1.50 x PV
3
)
9.6%
(Cost to R)
52 – 50.85
(IR of E)
5. Incremental Borrowing Rate for Lessee
Lessee if took a loan for similar asset/amount/
term, on DOC, what rate of interest should have
been charged by lender This is E’s
incremental borrow rate. (IBR)
Rare
Discussion
If IBR or IIR is based on a
variable let’s say repo + x%
then every year the
discount factor will change
due to change in repo
rate (not due to the
change in x%)
IR
PV
DF
Index rate
changes/RV
changes any
will be
accounted
using
original
interest rate
All other
changes
Revised
discount factor
on date of
remeasurment
to be
considered
Fixed
LPs
Vr
LPs
Index/Rate
Based
Part of LPs
and
considered in
IR of LL using
Index Rate
on DOC &
thereafter as
per Index Rate
existing on
date of
measurement
Other If reasonably certain
to be exercised by E
Guaranteed
by E
expected to
be paid by E
Not
considered
under LPs
& simply
charged to
Profit or
Loss
RV Purchase
Option
Term
Option
IIR of
Lease
IBR for
lessee
(on DOC)
Remeasurement in LL due to
(else)
Remeasurements
Interest at IIR/IBR
LPs
Modifications
(or change of Vr. LP to Fixed LPs)
LPs done
Change of VLP
in lease contract
to Fixed LPs
Lease Amortisation Table
IR of LL & Remeasurement (on DOC)
Remeasurement/Modifications
L.2: Remeasurement of LL
Example: DOC 1-4-2021
LPs 100,000 p.a. + 10,000 p.a., if in any year annual sales of
E > 5 crores (irrespective of future sales of E going below 5 crores)
Hence, Fixed LP 100,000
variable LP 10,000 p.a. ignored in IR of LL
But if E’s sales >5 crores then 10,000 p.a. will be fixed hence fixed LP will be 110,000 p.a.
This is an example of variable LP (other than index rate based) converting to fixed LPs on
happening of a contingent event.
Accounting Remeasurement accounting applies (same as remeasurement
accounting due to change in index/rates).
(ROU Asset change due to
remeasurement of LL)
Discount factor original jgsxk
(Change in LL due to
remeasurement
(any reason)
will be adjusted
through
ROU ASSET)
(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)
SJ Tips:
Remeasurement/modification
s interest rate revise
on date of remeasurement
or modification except in
this case
[A6] Accounting for Lessee
Being URGVSJ Exclusive

7. Modification of LL (Interest Rates to be revised as on date of modi.)
(Change in leaseterms)
(a) consideration is on
standalone basis &
(b) asset
- independent use
- not highly interested
Whether there
is an increase
in scope?
Whether it
is a separate
lease?
Account it as fresh
lease & not as a
modification
Remeasure LL
Account it as Remeasurement
Remeasure LL and
Remeasure ROU Asset
First, when
that is a scope
reduction
Any other
change in LL
adjusted from
ROU asset like
in case of
remeasurement
Reduce the
modification
date ROU asset
& LL
proportionately
Gain or Loss to
P or L
Adjust ROU Asset
Remeasurement
accounting applies
(In proportion
of scope
reduction)
Scope reduced, or Scope same, terms modify
No
Yes
Yes
No
SJ Tips:
Remeasurement/ Modification
LL value changes adjusted
from ROU Asset except in case
of scope reduction (modifica-
tion) difference of change
ROU asset & LL due to scope
t/f to P or L.
L.2: Subsequent Measurement of LL
(1) IR date (DOC) ROU Asset to be recognised at:
LL on IR xx
+ Lease Payments already made (hence not included in LL) xx
– Lease incentive (received by E from R and not adjusted in LPs) (xx)
IR value of ROU asset to be further adjusted xxx
for :
a) Initial Direct Costs by E xx
(Cost incurred by E, that would not have been increased if lease
contract was not entered into)
b) Provisioning for Decommissioning, Removal or Site Restoration Provided xxx
for (as per Ind AS 16/37) (ex
cept if it relates to production of inventory)
IR value of ROU Asset xxx
*If lessee increases any leasehold improvements before DOC of lease
then such expense is to be recognized as an asset under Ind AS 16/38,
as per recognition criteria given therein.
R.1: Right of use Asset: IR Accounting : Books of Lessee
R.2: Subsequent of ROU Asset
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.
If any adjustments made then it is
accounted prospective i.e. depreciation to
change propectively.

8. Applicability Optional Exemptions (Imp) Scope – Exemptions – Exclusions: Applicability of Ind AS 116
ST Lease Lease
of Low
value
asset
May not
apply 116
on other IA
that even
qualify to
be a lease Ind AS 104 Ind AS 41 Ind AS 115 Ind AS 38 Exclusions
Exploration
and Evaluation
Activities
E.g. Leases to
explore oil, gas,
reserves etc.
Biological
Assets on
lease with
the lessee
Service
Concession
Arrangements
Eg. Public
Private
Partnership
To not
apply 116 on
licensing rights IA
E.g. movie rights,
patents,
copyrights etc.
“Lessor”
of IPR
(Lessee)Low Value Asset Exemption (LVA)
New Asset’s value is considered
Low value in absolute terms and materiality
from lessee’s view point is not relevant
Lessee has option to not account under
Ind AS 116 and hence should charge of the
LPs on SL basis or other systematic basis
Option is available asset wise.
Asset used independently (not highly
inter-related with other asset) and
has its own benefits
ST Leases
1 Optional exemption
2 Choice is made a class of UA that
are taken on lease for ST
3 ST means Period < 12 months
(DOC)
4 Accounting if exemption opted
Expense the LPs over the LT on
SLM basis;
Unless:
another systematic basis is more
representative of E’s use of asset
5 ST Lease exemption for class of UA
is a choice of accounting policy
6

ST Lease Only recognition
exemption for E.
7 In case of modification of ST Lease
consider it as a fresh lease on date
of modification and accordingly by
account
Eg.
After 3m extended by
8 month
LT - 6m
DoM
6m - 3m + 8m
= 11m

(still eligible for ST Lease exemption)
even if 14m from DOC
8
If there is a purchase option, then
ST Lease exemption does not ap-
plies.
*Sublease Head Lease does not qualifies for LVA exemption
LVA exemption N.A.
B books esa Lessee
accounting of 116 applies
Sub-lease
B
C
Lessor accounting always be as per Ind AS 116
Still has available 116 exemption
Lease
A
Examples of LVA:
Office furniture, small appliance, mobile, desktop/computer/ IT equipments, storage devices, etc.Definition Classification of Lease Accounting by Lessor Sale and Lease
back
(covered
separately)
Lessor
Finance
Lease (FL)
Operating
Lease (OL)
Reclasification/
Modification
Lease of Land &
Building Combined
Finance
Lease
Plain Lessor
(Financer)
Manufacturer/
Dealer Lessor Unguaranteed
Residual value
(for lessor)
Current/Non-current
Presentation of
receivable
Revenue Recog-
nition + Interest
Income
Asset: Receivable
Income: Sales +
Interest Income
ACM Types
Accounting
Asset: Re-
ceivable
Income:
Interest/
Income
Operating
Lease
OLFL
LESSOR ACCOUNTING

9. Lessor Person that gives the Right to use the underlying asset
for a period of time in exchange of consideration
Finance A lease that t/f sub stantially all risk & rewards
Lease incidental to ownership of underlying asset.
Operating A lease that does not t/f sub stantially all risk and
Lease rewards incidental to ownership of underlying asset.
Definition
Classification of Lease (Lessor)Imp.
LT covers
substantially whole
part of life of asset
Asset t/f to E at
end of lease term
Purchase
option given to
E & reasonably
certain to be
exercised
PV of LPs
substantially covers
the cost of asset
Or
Or
Or
Or
Examples
(Non
conclusive)
(Financial Lease)
Renewal option given
to E, reasonably expected
to be exercised & LT +
Renewal period covers
substantial life of asset
Put/call
option
Residual value
guaranteed by E to R
such that it guarantees
minimum return to R.
LRs
designed to
cover
investment return/
operator’s
margin
Termination
option with E,
unreasonable to
be exercised
Variable
LRs significant
proportion
hence OL
Asset is so specific
that it has no other
use for Lessor
Or
Or
Other Indicators Indicators
Finance Lease: Plain Lessor
1 On buying asset to be given on lease Recognise an ‘Asset for Lease’
2 On DOC of lease debit Lessee
credit Asset for lease
Or
Residual
value
guaranteed
by lessee/3rd
party
Termination
Price
Purchase
option price
when it is
reasonably
certain to be
exercised by
the lessee
Fixed lease
payments net
of lease
incentives
adding IDC
Variable
LPs based
on an
index/rate
3 IR amount PV of lease payments + net investment in lease +
PV of UGRV [Net Investment in Lease]
4 UGRV : RV expected to be recovered by ‘R’ but not guaranteed by
E/3rd party
: This too is part of gross investment in lease (LPs + UGRV) and
included E’s IR amount of receivable known as Net investment
in lease �PV of (LPs + UGRV))
: Lessor to remeasure UGRV every year end/reporting date to
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)
5 Implicit Rate of interest that lessor charges/expects to receive under
the lease arrangement.
: (Manufacturing or Dealer lessor): If this is artificially r educed
(manufacturing/dealer lessor) then market interest rates
treated as IIR.
: IIR is the rate which discounts G. I. in lease to N.I. in lease.
Interest Rate :
CB R Leases an asset to E
Fair value/cost of asset to R 120 lacs
LRs 50 lacs p.a. for 3 years
LT 3 years
Life of Asset 3 years
Residual value expected to be (after 3 years) 12 lacs
Lease guarantees RV of 5 lacs only
* Accounting books for ‘R’
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
RV (Guaranted) = 5 lacs
LPs (Total) = 150 +5 = 155 L
UGRV = 12L (Total RV) – 5L (GRV) = 7L (UGRV)
Gross invest in lease = 155L + 7L = 162L
Net invest in lease = Cost of asset = 120L
IIR x% = 120 = 50L x AF3xx% + 5L x PV 3rd x% + 7L x PV 3rd x%
x is 14% p.a. (RHS) = 50L x 2.3216 + 12L x 0.675
= 116.08 + 8.10 = 124.18
x is 15% p.a. = 50L x 2.2832 + 12L x 0.657 = 122.05
x is 16% p.a. = 119.98 or 120/-
Lease Amortisation Table
Lessee Acc
ount in books of Lessor
Year
Op. Interest 16% LRs Balance
I 120 19.20 50 89.20
II 89.20 14.27 50 53.47
III 53.47 8.53* 50 12.00
* 8.53 ~ 8.55
(I) 12L No P/L
IV th year If R sold asse
t at (II)
10L 2L loss P/L
(III) 13L 1L gain P/L SJ Tip for C/NC classification
1st St
ep: 2nd Step:
Year 1 Balance Sheet
NCA
Lessee/Receivable 53.47
(B.F. - 89.20 – 35.73) CA Lessee/R
eceivable
35.73
(50 – 14.27)
BS presentation

10. Books of Lessee
1. DOC - Lease Liability & Roll Asset
*115.50 – 5/3 = 36.83 p.a.
2.
= Discount LPs @ IIR (16%)
= 50L x AF, 3, 16% + 5L x PV, 3, 16%
as Lessee’
s obligation only for 5L
=
50L x 2.2459 + 5L x 64.7
= 115.50 (and not 120)
What if in the 2nd year ‘R’ re-estimates RV to be 9L instead to 12L?
No change in accounting for lessee
Year Op. Interest 16% LRs Bal.
I 120 19.20 50 89.20
II 89.20 - 50 -
III - - 50 9
Re-measurement of IIR due t
o change in UGRV
120L
= 50L x AF 3 x% + 9 x PV 3 x%
x is 14% = 122.16
x is 15% = 120.08 or 120
Year 1 inter
est income recognised @ 16%
19.20
Year 1 inter
est income to be recognized @ 15%
18.00
(Post re-measur
ement (120 x 15%))
Interest reversal at year 2 (C.Y. Interest include)
1.20
Hence Op. Lease Rec. 89.20 – 1.20 = 88*
Year Op. Interest 15% LR Bal.
I 88* 13.20 50 51.20
II 51.20 7.80* 50 9
Q. Interest income in each year?
Ans.
Year Interest income
1 19.20
2 13.20 – 1.20 = 12
3 7.80
Lease Liability (Payable t
o R) ROU Asset
Year
Op. Int. 16% LP Bal. OP. Depr. (SLM) Bal.
I 115.50 18.48 50 83.98 115.50 36.83* 78.67
II 89.98 13.44 50 47.42 78.67 36.83 41.84
III 47.42 7.58 50 5 41.84 36.84 5
R -variable LPs
other than index/rate based feyrs gSa then recognized as income
Accounting books of lessor
Manufacturer/Dealer Lessor
(E.g. Boeing Company is selling its aircraft on lease)
E.g. Cost of production of aircraft
50 crores
Selling price/c
ash price/fair value of leasehold interest
60 crores
Option t
o purchase on lease
25 crores p.a. x 3 years
LT 3 year after which asset t/f to lessee E.I.R. 12% p.a.
Show accoun
ting in books of lessor ‘R’ (Boeing Company)
Sol. (a) Revenue recognised as per Ind AS 115
- When Performance Obligation (PO) is satisfied
- In case of goods, when control over asset is transferred
- Usually in case of lease it will be “DOC”.
(Ind AS 116 defines sales price as this)
Amount: Selling price -
(a) Fair value of leasehold interest Or
(b) PV of LPs, whichever is lower
Selling profit: Selling price – Cost of production/purchase
Finance Income over lease term: Total Profit – Selling Profit
Sol. W.N.1:
Selling price
(a) Fair value of leasehold interest 60
(b) PF of LPs: 25 AF 3 12% 60 approx
Selling price = 60 crore
W.N.2: Selling Profit
= SP – COP
= 60 – 50 = 10 crores
W.N.3: Total Finance include
= (25 x 3 – 50) – 10 = 15
W.N.4: Lease Amortisation Table
Year Op. Interest 12% LR Bal.
I 60 7.20 25 42.20
II 42.20 5.06 25 22.26
III 22.26 2.74* 25 NIL
*2.67 ~ 2.74 15.00
Journal Entry: On Date of t/f of Control /DOC
DOC Lessee Dr. 60
To Revenue (P or L) 60
P or L Dr. 50
To Cost of Production 50
What if the interest rate was (a) 10% p.a. (b) 13% p.a. Find Revenue on sale? & Interest income for each year?
Sol.
10% p.a.
W.N.1:
Sales Price: Lower of
(a) FV 60 crores
(b) PV of LPs (25 x AF 2 10%) 62.17 crores
Hence S.P. 60 cr
ores
Hence “Lessee” IR value
60 crores
There
fore IIR to be such that PV of 25 crores for 3 years = 60 crores (which will not be if
interest rate is 10% p.a.) Hence IIR - recalculated such that
60 = 25 x AF 3 x%
x = 12%
Lessee Amortisation: Same as previous c
ase
Interest rate 13% p.a.
W.N.1: Sales: Lower of
(a) FV 60 crores
(b) PV of LPs 25 X AF, 3, 13% 59.0 crores approx
Sales of 59
Hence selling profit will be 59 – 50 = 9 crores only &
IIR will be 13% p.a.
Lessee Amortisation Table:
Year Op. Interest 13% LP Balance
I 59 7.67 25 41.67
II 41.67 5.41 25 22.08
III 22.08 2.92 25 NIL
16.00 75 SJ Tips Formula :
Accounting for Mfg./Dealer Lessor
Sales = PV of LPs excludes UGRV
CoGS = Cost Price / CoP - PV of UGRV
Lessee IR amt = PV of LPs + PV of UGRV
(as discussed in plan lessor also)

11. Sale and Lease Back Transaction
Sale and lease back
lessor's view point
Operating Lease
lessor's
view point Finance
Lease
In case asset is sold and leased back such that there
is no t/f of R & R substantially associated with the
asset then thetransaction will be accounted simply
like a financing transaction under Ind AS 109
Accounting for S & LB
Step I
Proportion of FV of Rou Asset to FV of underlying asset
Step II
Allocate selling profit to Rou Asset 4 (Say 'x')
and balance4 (Say 'y')
Step III
Recognise Rou Asset at FV of Rou Asset - SP Proportion as above (x) Recognise LL 4 as usual
Selling Profit 4 'Y'
Journal Entry
Bank A/c Dr Sale Proceeds
Roll Asser (FV of Rou Asse
t -
Dr. at proportional CA
Proportiona
te selling profit)
To Gain on transfer (P or L)
Proportionate selling profit
(excl. Rou Asset related profit)
To LL PV of LPs
To PPE / Asse
t
CA
Sale & LB (esa LB
Finance Lease
S)
Sale & LB
Then split the transaction
into financing and S & LB
transaction
Accounts S & LB as
Financial Instrument
FL
for
E
FA
for
R
Under 109
Yes
Yes
Yes
No
No
No
FV - SP treated as prepaid LR &
accounting of S & LB applies
Accounting of S & LB applies
A B
Sale and lease back
In substance
there is no
'Sale'
1. CA has lost control over the asset completely
2. However, it still has retained R-O-U asset for 2 years
3. Hence, since it is 'sale' (being controlo transferred) sale
of office floor should be recognised - Ind AS 16/115
4. Transfer profit on sale of office floor shall also be recog-
nised.
5. Thereafter R-O-U asset & LL should be recognised by disc.
LPs at I.I.R.
6. But the LPs representing market rentals, would lead to
recognition of R-O-U asset at PV of LPs i.e. market rates and hence the asset will be recognised at fair value and not 'Cost' (in fact CA of such asset) sold & required for use by same party.
Thereafter Ind AS 116 requires for S & LB transaction accounting, in books of seller - lessee should be such that profit is only recognised for the proportion of asset that is ac- tually sold
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
Sale is at market
rates
Higher SP &
Higher LR
Lessor SP &
Reduced LRs
Excess of SP over
fair value regarded
as a separate con-
tract of financing
Hence LRs to be
allocated between
financing activity &
leasing activity
Reduced SP (unless
distress sale) due
to reduced LRs
hence difference of
FV & SP treated as
prepaid LRs.
Already disscused
Sale not at market
rates
SJ Interpretation
Transaction
at > FV of
Asset
Whether it
is a sale as
per Ind AS
115
SP < FMV &
not distress
sale

12. 2.
LPs recovered/earned to be
credited to P or L over the
lease term on SLM unless any
other systematic basis repre-
sents consumption of benefits
by lessee.
3.
IDC incurred by lessor are
capitalised & charged to P or L
in proportion of lease rentals/
payments. Lease incentives giv-
en by R to E also are regarded
as adjustment to the LPs.
1.
Lessor continues to recognise
the asset given on OL in its
book as PPE/Intangible Asset
and also depreciates
amortises it over its
estimated useful life.
Usually lease of:
a) Building may be FL
b) Land will be OL
Operating Lease
LESSOR BOOKS
Existing
Finance Lease
Inner in scope &
consideration in
independent?
If the modification, if
done on DOC, would
led the contract
classified as Operating
Lease on DOC itself
then
Treat CA of lessee
receivable asset as the
CA of PPE (asset given
on lease) and account
further as an Operating
Lease i.e.
future LPs
P or L Credited
Depreciation on
PPE asset
P or L Debited
Else
Yes No
Accounting for
modification under Ind AS
109 FI-Recognition &
Measurement
Ind AS 109 requires to
discount the revised FCF
at original EIR and t/f
gain/loss, including any
IDC if incurred by lessor
to P or L
Accounting
modification as a
separate lease
Existing
Operating Lease
Allocate LPs (including down payments,
IDC, incentives, etc) to land and building
in proportion of respective FVs, on Date of
Inception
Usually case of
Building
may be FL
Land
will be OL
Treat complete lease as an OL
Treat complete lease as a FL
Yes
Yes
No
No
No
Lease of Land & Building
Treat it as a fresh lease
contract
Any amount of accrued/ out-
standing LR balance treated
as a prepayment or incentive
under the new agreement
Modification to
existing lease
Modification of Lease Contracts
and
End
Land
component is
insignificant
Whether
fair value of
leasehold interest in
land and building
separately
identifiable?
Whether
whole lease
is an OL?
Treat the lease as a lease of BUILDING only
A (Lessor)
Lease Sub-Lease
Usual
accounting
for lessor
(Head) Lessor
or Sub Lessee
Intermediate Lessor
Head Lease
(A&B)
Sub-Lease
(B&C)
ST exemption available
(Remember!
LVA exemption N.A.)
Sub lease
Then
Then
Comparing
sub-lease term with
life of ROU Asset
(i.e. Head lease
term) & not life of
UA. Classify the sub
lease as OL or FL &
account usually
Accounting as
usual under 116
B (Lessee)
Intermediate
Lessor
Operating/
finance lease
Original
Lessee
ROU & LL
C (Lessee/
Sub-Lessee)
Usual
accounting
of lessee
Ind AS 116 states for lease of Land and Building combined
SUB-LEASES
Sub Lease
ST
exemption
not availed
B would
recognise
ROU Asset
& LL

13. How to move from
accounting under Ind AS
17 to Ind AS 116
Date of
Transition
Date of Initial
Application
(DOIA)
Optional Exemption For Lessee For Lessor
Continues accounting under 116
hence for the (prospective)
Finance lease by E
Prospectively accounted
under Ind AS 116
Entity-wide (for all leases single option)
Existing Lease contracts accounted as
Sale & LB by E
No need reassess on DOIA whether
‘sale’ as per 115 was involved
OL by E FL by E
Apply the principles
just discussed of OL
accounting by E on
date on IA
Prospectively FL
accounting
(no restatement
required)
Any deferred gain/loss under Ind
AS 17 on DOIA, to be adjusted
from ROU Asset
Operating Lessee by E
Retrospective application of Ind AS 116
Two Approaches permitted
(opt entity wise & not lease by lease)
Approach 1 Para C5 (a)
Approach 2: Para C5 (b)
Modified Retrospective Approach (Para C8 explain)
Retrospectively apply Ind
AS 116, but using IBR of
lessee on DOIA
Effect given on DOIA i.e.
1-4-19
No restatement of PY
figures or opening BS date
Any difference of LL & ROU asset
recognized onà 1-4-19 to be
adjus
ted from opening reserves on
that date.
Retrospectively applying
Ind AS 116, but using IBR of
lessee on DOIA (& not DOC
of lease)
Effect given by recognizing
LL & ROU asset on operating
BS date 1-4-18, difference
adjusted from reserves
P.Y. figures restated &
opening BS will be
prepared
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.
Full Retrospective approach
Continue to be classified similarly
Henceforth the accounting however to be
under Ind AS 116, subject to DOIA
adjustments discussed
1-4-2019
Example
DOC 1-4-15 “IIR/IBR of Lease LL & ROU LL & ROU Difference
1-4-15 1-4-18 Op Res 2018-19
recognise comparitives
restate
OP BS 1-4-18 IBR 1-4-19 LL & ROU LL & ROU Difference
Da
te
1-4-15 1-4-18 Op Res
recognise
DOIA 1-4-19 IBR 1-4-19 LL & ROU LL & ROU Difference No PY
of 116 1-4-15 1-4-19 1-4-19 Restatement
recognise Res adjust
1.
Hindsight
2.
Impairment
3.
ST leases
4.
Discount
Rate
5.
Initial Direct
Cost
Lessee can use hindsight information for determining the LT, etc. other lease related estimates while applying retrospective approach
Lease contract if onerous then im- pairment check may be done as per Ind AS 37 instead of Ind AS 36.
Lease remaining term 12 month or less from the DOIA (1-4-19) then lessee has option to use the ST lease exemption
Use single discount rate for a portfo- lio of leases
Ignore IDC accounting on DOIA.
Transition
Practical Expedient permitted for Lessee
(Chosen Lease by Lease & not entity wise)
On DOIA, any IA on operating leases with the Acquiree co.
which was recognized on DOA of business, will be written of on DOIA of 116 and ROU asset shall be recognized on DOIA of 116.
Difference adjusted from reserves.
Business Combination
1-4-2018
TRANSITIONAL PROVISIONS
of Ind AS 116
Opening
BS DateTransitional Provision of Ind AS 116
Explains
Contracts
classified as
lease under
Ind AS 17
Contracts that have
not been classified
as lease under
Ind AS 17
If sale and LB
accounted as

14. Ind AS-116 :
Leases
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