Ind AS 116 Basics Introduction and Definition

Ind AS 116

1. IND AS 116 – LEASES (A BRIEF INTRODUCTION)

2. LEASE Lease is a contract that conveys the right to control the use of an identified asset for a period of time in exchange for consideration. Right to control - means right to obtain substantial all economic benefits and direct the use of asset Accounting in the Books of Lessee Ind AS 116 introduces a single lessee accounting model and requires a lessee to recognize assets and liabilities for all leases. Concept of finance and operating lease is done away with in the context of lessee. A lessee is required to recognize a right-of-use asset representing its right to use the underlying leased asset and a lease liability representing its obligation to make lease payments. As a consequence, a lessee recognizes depreciation of the right-of-use asset and interest on the lease liability, and also classifies cash repayments of the lease liability into a principal portion and an interest portion . Lessor (Supplier) Lessee (Customer) Asset Lease Payments

3. Illustration Term : 5 Years Lease Payment : INR 1000 pa. Discount Rate : 10% Present Value of Lease Payments = 1000 x PVAF (10%, 5 yrs) = 1000 x 3.791 = 3791 RoU Asset Dr 3791 To Lease Liability 3791     Depreciation (3791/5) 758 To RoU Asset 758     Finance Cost (Interest) 379 Lease Liability (Balancing Figure) 621 To Bank 1000 A B C (B*10%) D E (B+C+D) F (C+D) Year Op Bal Fin Cost Lease Payments Cl Bal Lease Liab 1 3,791 379 -1,000 3,170 -621 2 3,170 317 -1,000 2,487 -683 3 2,487 249 -1,000 1,736 -751 4 1,736 174 -1,000 909 -826 5 909 91 -1,000 -909 -3,791

4. Accounting Operating Lease Finance Lease Initial No Entry Lease Receivables Dr To Asset To Gain/Loss (Lease Receivables = Present Value of Lease Payments) Subsequent Depreciation Dr To Asset Bank Dr To Rent NA Bank Dr To Finance Income To Lease Receivables Accounting in the books of Lessor lessor still has to classify leases as either finance or operating, depending on whether substantially all of the risk and rewards incidental to ownership of the underlying asset have been transferred.

5. Exemptions from Recognition & Measurement Short Term Leases – Less than 12 months from commencement date Low Value Lease – No monetary limits defined Dates Inception date - earlier of agreement date or the date of commitment on principle terms (date for assessment of lease) Commencement date - when asset is available to use (accounting start from this date) Discount Rate Interest rate implicit in lease (Lessor’s IRR) If above not determinable, then lessee’s incremental borrowing rate

6. Extract from Reliance Annual Report for FY 23-24 (Notes to Accounts and Disclosures)

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