Ind AS 116 Leases
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Dec 26, 2019
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About This Presentation
Ind AS 116 Lease is a new accounting standard in place of Ind AS 17 Lease.
Slide Content
Scope
AnentityshallapplythisStandardtoallleases,includingleasesofright-of-useassetsina
sublease,exceptfor:
a)leasestoexplorefororuseminerals,oil,naturalgasandsimilarnon-regenerative
resources,
b)leasesofbiologicalassetswithinthescopeofIndAS41–Agriculture,heldbya
lessee,
c)serviceconcessionarrangementswithinthescopeofIndAS115-Revenuefrom
ContractswithCustomers,
d)licencesofintellectualpropertygrantedbyalessorwithinthescopeofIndAS115-
RevenuefromContractswithCustomers,and
e)rightsheldbyalesseeunderlicensingagreementswithinthescopeofIndAS38-
IntangibleAssets,forsuchitemsasmotionpicturefilms,videorecordings,plays,
manuscripts,patentsandcopyrights.
Lease:Acontract,orpartofacontract,thatconveystherighttocontroltheusean
assetforaperiodoftimeinexchangeforconsideration.
Sublease:Atransactionforwhichanunderlyingassetisreleasedbyalessee
(‘intermediatelessor’)toathirdparty,andthelease(‘headlease’)betweenthehead
lessorandlesseeremainsineffect.
2
AnentityshallapplythisStandardtoallleases,includingleasesofright-of-useassetsina
sublease,exceptfor:
a)leasestoexplorefororuseminerals,oil,naturalgasandsimilarnon-regenerative
resources,
b)leasesofbiologicalassetswithinthescopeofIndAS41–Agriculture,heldbya
lessee,
c)serviceconcessionarrangementswithinthescopeofIndAS115-Revenuefrom
ContractswithCustomers,
d)licencesofintellectualpropertygrantedbyalessorwithinthescopeofIndAS115-
RevenuefromContractswithCustomers,and
e)rightsheldbyalesseeunderlicensingagreementswithinthescopeofIndAS38-
IntangibleAssets,forsuchitemsasmotionpicturefilms,videorecordings,plays,
manuscripts,patentsandcopyrights.
Lease:Acontract,orpartofacontract,thatconveystherighttocontroltheusean
assetforaperiodoftimeinexchangeforconsideration.
Sublease:Atransactionforwhichanunderlyingassetisreleasedbyalessee
(‘intermediatelessor’)toathirdparty,andthelease(‘headlease’)betweenthehead
lessorandlesseeremainsineffect.
2
Atinceptionofacontract,anentityshallassesswhetherthecontractis,orcontains,a
lease.
Acontractis,orcontains,aleaseifthecontractconveystherighttocontroltheuseofan
identifiedassetforaperiodoftimeinexchangeforconsideration.
Toassesswhetherthecontractconveystherighttocontroltheuseofanidentified
asset,thecustomerhasbothofthefollowing:
a)therighttoobtainsubstantiallyalloftheeconomicbenefitsfromuseofthe
identifiedasset(a‘benefit’element),and
b)therighttodirecttheuseoftheidentifiedasset(a‘power’element).
Acustomerdoesnothavetherighttouseanidentifiedassetifthesupplierhasthe
substantiverighttosubstitutetheassetthroughouttheperiodofuse.
Asupplier’srighttosubstituteanassetissubstantiveonlyifbothofthefollowing
conditionsexist:
a)thesupplierhasthepracticalabilitytosubstitutealternativeassetsthroughout
theperiodofuse,and
b)thesupplierwouldbenefiteconomicallyfromtheexerciseofitsrightto
substitutetheasset.
Identifying a lease
3
lease.
Acontractis,orcontains,aleaseifthecontractconveystherighttocontroltheuseofan
identifiedassetforaperiodoftimeinexchangeforconsideration.
Toassesswhetherthecontractconveystherighttocontroltheuseofanidentified
asset,thecustomerhasbothofthefollowing:
a)therighttoobtainsubstantiallyalloftheeconomicbenefitsfromuseofthe
identifiedasset(a‘benefit’element),and
b)therighttodirecttheuseoftheidentifiedasset(a‘power’element).
Acustomerdoesnothavetherighttouseanidentifiedassetifthesupplierhasthe
substantiverighttosubstitutetheassetthroughouttheperiodofuse.
Asupplier’srighttosubstituteanassetissubstantiveonlyifbothofthefollowing
conditionsexist:
a)thesupplierhasthepracticalabilitytosubstitutealternativeassetsthroughout
theperiodofuse,and
b)thesupplierwouldbenefiteconomicallyfromtheexerciseofitsrightto
substitutetheasset.
Identifying a lease
3
Identifiedasset:Anassetthatisthesubjectofaleasemustbespecificallyidentified.Thiswillbe
caseifeitherofthefollowingapplies:
a)Anassetisexplicitlyspecifiedinthecontract(Foreg.aspecifiedserialnumber),or
b)Anassetisimplicitlyspecifiedinthecontract(Foreg.whenthereisonlyoneassetthatis
capableofbeingusedtomeetthecontractterms).
Righttoobtaineconomicbenefitsfromuse:Acustomercanobtaineconomicbenefitsfromuse
ofanassetdirectlyorindirectlyinmanyways,suchasbyusing,holdingorsub-leasingtheasset.
Righttodirecttheuse:Acustomerhastherighttodirecttheuseofanidentifiedasset
throughouttheperiodofuseonlyifeither:
a)thecustomerhastherighttodirecthowandforwhatpurposetheassetisused
throughouttheperiodofuse,or
b)therelevantdecisionsabouthowandforwhatpurposetheassetisusedare
predeterminedand:
i.thecustomerhastherighttooperatetheasset(ortodirectotherstooperatethe
assetinamannerthatitdetermines)throughouttheperiodofuse,withoutthe
supplierhavingtherighttochangethoseoperatinginstructions,or
ii.thecustomerdesignedtheasset(orspecificaspectsoftheasset)inawaythat
predetermineshowandforwhatpurposetheassetwillbeusedthroughoutthe
periodofuse.
Identifying a lease
4
caseifeitherofthefollowingapplies:
a)Anassetisexplicitlyspecifiedinthecontract(Foreg.aspecifiedserialnumber),or
b)Anassetisimplicitlyspecifiedinthecontract(Foreg.whenthereisonlyoneassetthatis
capableofbeingusedtomeetthecontractterms).
Righttoobtaineconomicbenefitsfromuse:Acustomercanobtaineconomicbenefitsfromuse
ofanassetdirectlyorindirectlyinmanyways,suchasbyusing,holdingorsub-leasingtheasset.
Righttodirecttheuse:Acustomerhastherighttodirecttheuseofanidentifiedasset
throughouttheperiodofuseonlyifeither:
a)thecustomerhastherighttodirecthowandforwhatpurposetheassetisused
throughouttheperiodofuse,or
b)therelevantdecisionsabouthowandforwhatpurposetheassetisusedare
predeterminedand:
i.thecustomerhastherighttooperatetheasset(ortodirectotherstooperatethe
assetinamannerthatitdetermines)throughouttheperiodofuse,withoutthe
supplierhavingtherighttochangethoseoperatinginstructions,or
ii.thecustomerdesignedtheasset(orspecificaspectsoftheasset)inawaythat
predetermineshowandforwhatpurposetheassetwillbeusedthroughoutthe
periodofuse.
Identifying a lease
4
Flowchart for identifying a lease
5
Is there an identified asset?
Does the customer have the right to obtain substantially all of the economic
benefits from use of the identified asset throughout the period of use?
Does the customerhave the right to operate the asset throughout the
period of use, without the supplier having the right to change those
operating instructions?
Does the customer design the asset in a way that predetermines how and
for what purpose the asset will be used throughout the period of use?
The contract
contains a lease
The contract does
not contain a lease
Yes
Yes
No
Does the customer, the supplier or
neither party have the right to
direct how and for what purpose
the asset is used throughout the
period of use?
No
SupplierCustomer
Yes
Yes No
No
No asset,
no lease.
No control,
no lease
Neither; how and for what purpose the
asset will be used is predetermined
5
Is there an identified asset?
Does the customer have the right to obtain substantially all of the economic
benefits from use of the identified asset throughout the period of use?
Does the customerhave the right to operate the asset throughout the
period of use, without the supplier having the right to change those
operating instructions?
Does the customer design the asset in a way that predetermines how and
for what purpose the asset will be used throughout the period of use?
The contract
contains a lease
The contract does
not contain a lease
Yes
Yes
No
Does the customer, the supplier or
neither party have the right to
direct how and for what purpose
the asset is used throughout the
period of use?
No
SupplierCustomer
Yes
Yes No
No
No asset,
no lease.
No control,
no lease
Neither; how and for what purpose the
asset will be used is predetermined
6
Lease verses other contracts
Lease verses Sale contract
Lease verses Service contract
Lease contract:
Contractconveysthe
righttocontrolthe
useofidentified
assetforaperiodof
time.
Sale contract:
Contracttransfers
thecontrolof
identifiedasset.
Lease contract:
Customercontrols
theuseofan
identifiedassetfor
aperiodoftime.
Service contract:
Suppliercontrols
theuseofasset
whichisusedto
delivertheservice.
Lease verses other contracts
Lease verses Sale contract
Lease verses Service contract
Lease contract:
Contractconveysthe
righttocontrolthe
useofidentified
assetforaperiodof
time.
Sale contract:
Contracttransfers
thecontrolof
identifiedasset.
Lease contract:
Customercontrols
theuseofan
identifiedassetfor
aperiodoftime.
Service contract:
Suppliercontrols
theuseofasset
whichisusedto
delivertheservice.
7
Examples for identifying a lease
Example Identified asset?
Substantive
substitution rights?
Customer has a right to control
the use of the identified asset?
Lease?
Contract between
Customer and a freight
carrier (Supplier)
provides Customer with
the use of 10 rail cars of a
particular type for five
years.
Yes. Specific rails cars
identified in contract.
No. Can only be
substituted for repairs
or maintenance.
Yes. Customer has exclusive use of
rails cars during the contract
period so that it has the right to
substantially all of the economic
benefits from use of the rail cars.
Customer has the right to change
how and for what purpose the cars
are used
–it directs when and where the
cars are used, and which goods are
transported.
Supplier’s rights (restrictions on
specified types of cargo) are
protective only. Supplier’s control
of engines required to transport
the rail cars does not give it the
right to control the use of the cars.
Yes –lease of rail
cars (not engines).
Contract between
Customer and Supplier
requires Supplier to
transport a specified
quantity of goods by
using a specified type of
rail car in accordance
with a stated timetable
for five years.
No. Supplier has large
pool of similar items
and none are specified
in the contract.
Yes. Alternatives are
readily available at
minimal cost. Supplier
benefits economically
by using its pool of
available rolling stock
in the most efficient
manner.
No. Supplier selects which are
used for each delivery and obtains
substantially all of the economic
benefits from use of the rail cars.
No. Customer is
purchasing freight
capacity (service).
Examples for identifying a lease
Example Identified asset?
Substantive
substitution rights?
Customer has a right to control
the use of the identified asset?
Lease?
Contract between
Customer and a freight
carrier (Supplier)
provides Customer with
the use of 10 rail cars of a
particular type for five
years.
Yes. Specific rails cars
identified in contract.
No. Can only be
substituted for repairs
or maintenance.
Yes. Customer has exclusive use of
rails cars during the contract
period so that it has the right to
substantially all of the economic
benefits from use of the rail cars.
Customer has the right to change
how and for what purpose the cars
are used
–it directs when and where the
cars are used, and which goods are
transported.
Supplier’s rights (restrictions on
specified types of cargo) are
protective only. Supplier’s control
of engines required to transport
the rail cars does not give it the
right to control the use of the cars.
Yes –lease of rail
cars (not engines).
Contract between
Customer and Supplier
requires Supplier to
transport a specified
quantity of goods by
using a specified type of
rail car in accordance
with a stated timetable
for five years.
No. Supplier has large
pool of similar items
and none are specified
in the contract.
Yes. Alternatives are
readily available at
minimal cost. Supplier
benefits economically
by using its pool of
available rolling stock
in the most efficient
manner.
No. Supplier selects which are
used for each delivery and obtains
substantially all of the economic
benefits from use of the rail cars.
No. Customer is
purchasing freight
capacity (service).
8
Embeddedlease:Theterm“embeddedlease”isnotdefinedineitherIndAS116orIFRS16orASC
842,referstoacontractwhichcontainselementsofaleasecontracti.e.identifiedassetscontrolled
bylesseebutnotexplicitlyspecifiedasLeaseAgreement.
Examplesrelatedtoembeddedleasecontractsare:
Manufacturingcontract:Alargeretailercontractswithanentitytomanufactureshoesforthe
retailer.Thecontractissolargethatthemanufacturerhasaspecificfacilitythatonly
manufacturesshoesfortheretailer.Thecontractmanufacturerarrangementcontainsan
embeddedleaseforthephysicalmanufacturingspaceandequipmenttoproducetheshoes.
Advertisingcontract:Acompanyentersintoacontracttoadvertiseonabillboard.Althoughthis
contractcouldbewrittenasanadvertisingservicecontract,therighttousethebillboardmay
meetthedefinitionofanembeddedlease.
Transportationcontract:Acompanyentersintoanarrangementtotransportgoodsusingafleet
ofrailcars.Thetransportationcontractcontainsanembeddedrighttousethecarsduringthe
periodofthetransportationcontract.
ITservicecontract:AhospitalsubjecttoHealthInsurancePortabilityandAccountability
Act(HIPAA)regulationsengagesaninformationtechnology(IT)serviceprovidertoprovidecloud-
computingservices.Toensurepatientprivacyrightsarenotviolated,thecontractrequiresa
dedicatedserverbeusedtoprovidetheservices.Thehospitaldecideswhenandhowthe
dedicatedserverisusedbasedonitsinstructionstotheITserviceprovider.Thecontractcontains
anembeddedleaseofthededicatedserver.
How to identify Embedded Leases within Contracts
Embeddedlease:Theterm“embeddedlease”isnotdefinedineitherIndAS116orIFRS16orASC
842,referstoacontractwhichcontainselementsofaleasecontracti.e.identifiedassetscontrolled
bylesseebutnotexplicitlyspecifiedasLeaseAgreement.
Examplesrelatedtoembeddedleasecontractsare:
Manufacturingcontract:Alargeretailercontractswithanentitytomanufactureshoesforthe
retailer.Thecontractissolargethatthemanufacturerhasaspecificfacilitythatonly
manufacturesshoesfortheretailer.Thecontractmanufacturerarrangementcontainsan
embeddedleaseforthephysicalmanufacturingspaceandequipmenttoproducetheshoes.
Advertisingcontract:Acompanyentersintoacontracttoadvertiseonabillboard.Althoughthis
contractcouldbewrittenasanadvertisingservicecontract,therighttousethebillboardmay
meetthedefinitionofanembeddedlease.
Transportationcontract:Acompanyentersintoanarrangementtotransportgoodsusingafleet
ofrailcars.Thetransportationcontractcontainsanembeddedrighttousethecarsduringthe
periodofthetransportationcontract.
ITservicecontract:AhospitalsubjecttoHealthInsurancePortabilityandAccountability
Act(HIPAA)regulationsengagesaninformationtechnology(IT)serviceprovidertoprovidecloud-
computingservices.Toensurepatientprivacyrightsarenotviolated,thecontractrequiresa
dedicatedserverbeusedtoprovidetheservices.Thehospitaldecideswhenandhowthe
dedicatedserverisusedbasedonitsinstructionstotheITserviceprovider.Thecontractcontains
anembeddedleaseofthededicatedserver.
How to identify Embedded Leases within Contracts
9
Lease term
Anentityshalldeterminetheleasetermasthenon-cancellableperiodofalease,together
withboth:
i.periodscoveredbyanoptiontoextendtheleaseifthelesseeisreasonablycertain
toexercisethatoption,and
ii.periodscoveredbyanoptiontoterminatetheleaseifthelesseeisreasonably
certainnottoexercisethatoption.
Non-cancellable period of lease
Period covered by an option to extend
the lease
Period covered by an option to terminate
the lease
if lessee is reasonably certain
to exercise option
if lessee is reasonably certain
notto exercise option
Non-cancellable period means the period during which the contract is enforceable.
Lease term
Anentityshalldeterminetheleasetermasthenon-cancellableperiodofalease,together
withboth:
i.periodscoveredbyanoptiontoextendtheleaseifthelesseeisreasonablycertain
toexercisethatoption,and
ii.periodscoveredbyanoptiontoterminatetheleaseifthelesseeisreasonably
certainnottoexercisethatoption.
Non-cancellable period of lease
Period covered by an option to extend
the lease
Period covered by an option to terminate
the lease
if lessee is reasonably certain
to exercise option
if lessee is reasonably certain
notto exercise option
Non-cancellable period means the period during which the contract is enforceable.
10
Lease term
Example:
Anentityhadtakenapropertyonrentforofficialpurposeforaperiodof11monthsfrom
01/06/2019to30/04/2020andboththepartiescanterminatetheagreementbygiving
advanceintimationofonemonthtotheotherparty.
Theagreementcanberenewedfurtherforaperiodof11monthsfrom01/05/2020to
31/03/2021atbothpartiesmutuallyagreeabletermswithanincreaseinrentof10%.
Whatistheleaseterm?
Non-cancellable period of
lease
Period covered by an
option to terminate the
lease
Period covered by an
option to extend the
lease
01/06/2019 30/06/2019 30/04/2020 31/03/2021
Lease term:
Non-cancellable period of lease = 1 month (From 01/06/2019 to 30/06/2019)
Plus: Period covered by an option to extend the lease if lessee is reasonably certain to exercise
option= 11 months (From 01/05/2020 to 31/03/2021)
Plus: Period covered by an option to terminate the lease if lessee is reasonably certain not to
exercise option= 10 months (From 01/07/2019 to 30/04/2020)
Hence, lease term = 22 months from 01/06/2019 to 31/03/2021.
01/07/2019 01/05/2020
Lease term
Example:
Anentityhadtakenapropertyonrentforofficialpurposeforaperiodof11monthsfrom
01/06/2019to30/04/2020andboththepartiescanterminatetheagreementbygiving
advanceintimationofonemonthtotheotherparty.
Theagreementcanberenewedfurtherforaperiodof11monthsfrom01/05/2020to
31/03/2021atbothpartiesmutuallyagreeabletermswithanincreaseinrentof10%.
Whatistheleaseterm?
Non-cancellable period of
lease
Period covered by an
option to terminate the
lease
Period covered by an
option to extend the
lease
01/06/2019 30/06/2019 30/04/2020 31/03/2021
Lease term:
Non-cancellable period of lease = 1 month (From 01/06/2019 to 30/06/2019)
Plus: Period covered by an option to extend the lease if lessee is reasonably certain to exercise
option= 11 months (From 01/05/2020 to 31/03/2021)
Plus: Period covered by an option to terminate the lease if lessee is reasonably certain not to
exercise option= 10 months (From 01/07/2019 to 30/04/2020)
Hence, lease term = 22 months from 01/06/2019 to 31/03/2021.
01/07/2019 01/05/2020
11
Lease term
Theleasetermbeginsatthecommencementdateandincludesanyrent-freeperiods
providedtothelesseebythelessor.
Commencementdate:Thedateonwhichalessormakesanunderlyingassetavailable
forusebyalessee.
Factorsconsideredwhenassessingreasonablycertaincriteriainclude:
a)contractualtermsandconditionsfortheoptionalperiodscomparedwithmarket
rates,
b)significantleaseholdimprovementsundertaken(orexpectedtobeundertaken),
c)costsrelatingtotheterminationofthelease,
d)theimportanceofthatunderlyingassettothelessee’soperations,
e)conditionalityassociatedwithexercisingtheoption.
Anentityshallrevisetheleasetermifthereisachangein:
a)non-cancellableperiodofthelease,
b)periodscoveredbyanoptiontoextendtheleaseifthelesseeisreasonablycertainto
exercisethatoption,and
c)periodscoveredbyanoptiontoterminatetheleaseifthelesseeisreasonably
certainnottoexercisethatoption.
Lease term
Theleasetermbeginsatthecommencementdateandincludesanyrent-freeperiods
providedtothelesseebythelessor.
Commencementdate:Thedateonwhichalessormakesanunderlyingassetavailable
forusebyalessee.
Factorsconsideredwhenassessingreasonablycertaincriteriainclude:
a)contractualtermsandconditionsfortheoptionalperiodscomparedwithmarket
rates,
b)significantleaseholdimprovementsundertaken(orexpectedtobeundertaken),
c)costsrelatingtotheterminationofthelease,
d)theimportanceofthatunderlyingassettothelessee’soperations,
e)conditionalityassociatedwithexercisingtheoption.
Anentityshallrevisetheleasetermifthereisachangein:
a)non-cancellableperiodofthelease,
b)periodscoveredbyanoptiontoextendtheleaseifthelesseeisreasonablycertainto
exercisethatoption,and
c)periodscoveredbyanoptiontoterminatetheleaseifthelesseeisreasonably
certainnottoexercisethatoption.
12
Recognition and Measurement by Lessee
Initial recognition and measurement
Atthecommencementdate,alesseeshallrecognisearight-of-useassetandalease
liability.
Atthecommencementdate,alesseeshallmeasuretheright-of-useassetatcost.
Atthecommencementdate,alesseeshallmeasuretheleaseliabilityatthepresentvalue
oftheleasepaymentsthatarenotpaidatthatdate.
Right-of-use asset Lease liability
•Lease liability
•Lease payments made at or
before the commencement date
•Initial direct costs
•Restoration costs
Present value of lease payments
•Fixed payments
•Variable lease payments
•Residual value guarantees
•Exercise price of purchase option
•Termination penalty
Cost
Recognition and Measurement by Lessee
Initial recognition and measurement
Atthecommencementdate,alesseeshallrecognisearight-of-useassetandalease
liability.
Atthecommencementdate,alesseeshallmeasuretheright-of-useassetatcost.
Atthecommencementdate,alesseeshallmeasuretheleaseliabilityatthepresentvalue
oftheleasepaymentsthatarenotpaidatthatdate.
Right-of-use asset Lease liability
•Lease liability
•Lease payments made at or
before the commencement date
•Initial direct costs
•Restoration costs
Present value of lease payments
•Fixed payments
•Variable lease payments
•Residual value guarantees
•Exercise price of purchase option
•Termination penalty
Cost
13
Lease liability
Paymentsincludedinthemeasurementoftheleaseliabilityarefollowing:
a)fixedpayments(includingin-substancefixedpayments),lessleaseincentives,
b)variableleasepaymentsthatdependonanindexorarate,
c)amountsexpectedtobepayablebythelesseeunderresidualvalueguarantees,
d)theexercisepriceofapurchaseoptionifthelesseeisreasonablycertaintoexercise
thatoption,and
e)paymentsofpenaltiesforterminatingthelease,iftheleasetermreflectsthelessee
exercisinganoptiontoterminatethelease.
Fixedpayments:Paymentsmadebyalesseetoalessorfortherighttousean
underlyingassetduringtheleaseterm,excludingvariableleasepayments.
In-substancefixedleasepayments:Paymentsthatmay,inform,containvariability
butthat,insubstance,areunavoidable.Forexample,paymentsthatmustbemade
onlyifanassetisproventobecapableofoperatingduringthelease,oronlyifan
eventoccursthathasnogenuinepossibilityofnotoccurring.
Leaseincentives:Paymentsmadebyalessortoalesseeassociatedwithalease,or
thereimbursementorassumptionbyalessorofcostsofalessee.
Forexample,up-frontcashpaymentorreimbursementofrelocationcosts.
Lease liability
Paymentsincludedinthemeasurementoftheleaseliabilityarefollowing:
a)fixedpayments(includingin-substancefixedpayments),lessleaseincentives,
b)variableleasepaymentsthatdependonanindexorarate,
c)amountsexpectedtobepayablebythelesseeunderresidualvalueguarantees,
d)theexercisepriceofapurchaseoptionifthelesseeisreasonablycertaintoexercise
thatoption,and
e)paymentsofpenaltiesforterminatingthelease,iftheleasetermreflectsthelessee
exercisinganoptiontoterminatethelease.
Fixedpayments:Paymentsmadebyalesseetoalessorfortherighttousean
underlyingassetduringtheleaseterm,excludingvariableleasepayments.
In-substancefixedleasepayments:Paymentsthatmay,inform,containvariability
butthat,insubstance,areunavoidable.Forexample,paymentsthatmustbemade
onlyifanassetisproventobecapableofoperatingduringthelease,oronlyifan
eventoccursthathasnogenuinepossibilityofnotoccurring.
Leaseincentives:Paymentsmadebyalessortoalesseeassociatedwithalease,or
thereimbursementorassumptionbyalessorofcostsofalessee.
Forexample,up-frontcashpaymentorreimbursementofrelocationcosts.
14
Lease liability
Variableleasepayments:Theportionofpaymentsmadebyalesseetoalessorforthe
righttouseanunderlyingassetduringtheleasetermthatvariesbecauseofchangesin
factsorcircumstancesoccurringafterthecommencementdate,otherthanthepassageof
time.
Variableleasepaymentsthatdependonanindexorarateshouldinitiallybe
measuredusingtheindexorrateasatthecommencementdate.
Examplesofvariableleasepaymentsthatdependonanindexorarateare:
a)paymentslinkedtoaconsumerpriceindex,
b)paymentslinkedtoabenchmarkinterestrate(suchasLIBOR),
c)paymentsthatvarytoreflectchangesinmarketrentalrates.
Variableleasepaymentsthatdonotdependonanindexorarateareexcludedfrom
measurementofleaseliabilitiesandarerecognisedinprofitorlossintheperiodin
whichincurred.Forexample,variableleasepaymentslinkedtofutureperformance
oruseoftheunderlyingasset.
Residualvalueguarantee:Aguaranteemadetoalessorbyapartyunrelatedtothelessor
thatthevalue(orpartofthevalue)ofanunderlyingassetattheendofaleasewillbeat
leastaspecifiedamount.
Lease liability
Variableleasepayments:Theportionofpaymentsmadebyalesseetoalessorforthe
righttouseanunderlyingassetduringtheleasetermthatvariesbecauseofchangesin
factsorcircumstancesoccurringafterthecommencementdate,otherthanthepassageof
time.
Variableleasepaymentsthatdependonanindexorarateshouldinitiallybe
measuredusingtheindexorrateasatthecommencementdate.
Examplesofvariableleasepaymentsthatdependonanindexorarateare:
a)paymentslinkedtoaconsumerpriceindex,
b)paymentslinkedtoabenchmarkinterestrate(suchasLIBOR),
c)paymentsthatvarytoreflectchangesinmarketrentalrates.
Variableleasepaymentsthatdonotdependonanindexorarateareexcludedfrom
measurementofleaseliabilitiesandarerecognisedinprofitorlossintheperiodin
whichincurred.Forexample,variableleasepaymentslinkedtofutureperformance
oruseoftheunderlyingasset.
Residualvalueguarantee:Aguaranteemadetoalessorbyapartyunrelatedtothelessor
thatthevalue(orpartofthevalue)ofanunderlyingassetattheendofaleasewillbeat
leastaspecifiedamount.
15
Exampleofvariableleasepaymentthatdependonarate
Lesseeentersintoaleasefor5years,withasingleleasepaymentpayableatthebeginningofeachyear.The
initialleasepaymentisRs.1,00,000.LeasepaymentswillincreasebytherateofLIBOReachyear.Atthedate
ofcommencementofthelease,LIBORis2percent.Assumethattheinterestrateimplicitintheleaseis5
percent.
Theleasepaymentsshouldinitiallybemeasuredusingtherate(i.e.LIBOR)asatthecommencementdate.
LIBORatthatdateis2percent;therefore,inmeasuringtheleaseliability,itisassumedthateachyearthe
paymentswillincreaseby2percent,asfollows:
Lease liability
Year Lease payment Discount factor
Present value of lease
payment
1 1,00,000 1.000 1,00,000
2 1,02,000 0.952 97,143
3 1,04,040 0.907 94,367
4 1,06,121 0.863 91,671
5 1,08,243 0.822 89,052
Total 4,72,233
Therefore, the lease liability is initially measured at Rs.4,72,233.
Exampleofvariableleasepaymentthatdependonarate
Lesseeentersintoaleasefor5years,withasingleleasepaymentpayableatthebeginningofeachyear.The
initialleasepaymentisRs.1,00,000.LeasepaymentswillincreasebytherateofLIBOReachyear.Atthedate
ofcommencementofthelease,LIBORis2percent.Assumethattheinterestrateimplicitintheleaseis5
percent.
Theleasepaymentsshouldinitiallybemeasuredusingtherate(i.e.LIBOR)asatthecommencementdate.
LIBORatthatdateis2percent;therefore,inmeasuringtheleaseliability,itisassumedthateachyearthe
paymentswillincreaseby2percent,asfollows:
Lease liability
Year Lease payment Discount factor
Present value of lease
payment
1 1,00,000 1.000 1,00,000
2 1,02,000 0.952 97,143
3 1,04,040 0.907 94,367
4 1,06,121 0.863 91,671
5 1,08,243 0.822 89,052
Total 4,72,233
Therefore, the lease liability is initially measured at Rs.4,72,233.
16
Lease liability
Discountrate:Theleasepaymentsshallbediscountedusing:
•theinterestrateimplicitinthelease,or
•iftheinterestrateimplicitintheleasecannotbereadilydetermined,thelessee’s
incrementalborrowingrate.
Interestrateimplicitinthelease:Therateofinterestthatcausesthepresentvalueof
a.leasepaymentsand
b.unguaranteedresidualvalue
toequalthesumof
i.fairvalueoftheunderlyingassetand
ii.anyinitialdirectcostsofthelessor.
Unguaranteedresidualvalue:Thatportionoftheresidualvalueoftheunderlying
asset,therealisationofwhichbyalessorisnotassuredorguaranteedsolelybya
partyrelatedtothelessor.
Lessee’sincrementalborrowingrate:Therateofinterestthatalesseewouldhaveto
paytoborrowoverasimilarterm,andwithasimilarsecurity,thefundsnecessaryto
obtainanassetofasimilarvaluetotheright-of-useassetinasimilareconomic
environment.
Lease liability
Discountrate:Theleasepaymentsshallbediscountedusing:
•theinterestrateimplicitinthelease,or
•iftheinterestrateimplicitintheleasecannotbereadilydetermined,thelessee’s
incrementalborrowingrate.
Interestrateimplicitinthelease:Therateofinterestthatcausesthepresentvalueof
a.leasepaymentsand
b.unguaranteedresidualvalue
toequalthesumof
i.fairvalueoftheunderlyingassetand
ii.anyinitialdirectcostsofthelessor.
Unguaranteedresidualvalue:Thatportionoftheresidualvalueoftheunderlying
asset,therealisationofwhichbyalessorisnotassuredorguaranteedsolelybya
partyrelatedtothelessor.
Lessee’sincrementalborrowingrate:Therateofinterestthatalesseewouldhaveto
paytoborrowoverasimilarterm,andwithasimilarsecurity,thefundsnecessaryto
obtainanassetofasimilarvaluetotheright-of-useassetinasimilareconomic
environment.
17
Thecostoftheright-of-useassetshallcomprise:
a)theamountoftheinitialmeasurementoftheleaseliability,
b)anyleasepaymentsmadeatorbeforethecommencementdate,lessanylease
incentivesreceived,
c)anyinitialdirectcostsincurredbythelessee,and
d)anestimateofcoststobeincurredbythelesseeindismantlingandremovingthe
underlyingasset,restoringthesiteonwhichitislocatedorrestoringtheunderlying
assettotheconditionrequiredbythetermsandconditionsofthelease,unlessthose
costsareincurredtoproduceinventories.
Right-of-use asset
Initialdirectcosts:Incrementalcostsofobtainingaleasethatwouldhavenotbeen
incurredifleasehadnotbeenobtained,exceptforsuchcostsincurredbya
manufacturerordealerlessorinconnectionwithafinancelease.Forexample,
brokerage.
Restorationcosts:Thelesseeincurstheobligationforrestorationcostseitheratthe
commencementdateorasaconsequenceofhavingusedtheunderlyingassetduring
aparticularperiod.Suchrestorationcostsarerecognisedaspartoftheright-of-use
assetandtheestimatedliabilityisrecognisedasprovision.Itisnotincludedaspart
oftheleaseliability.
Thecostoftheright-of-useassetshallcomprise:
a)theamountoftheinitialmeasurementoftheleaseliability,
b)anyleasepaymentsmadeatorbeforethecommencementdate,lessanylease
incentivesreceived,
c)anyinitialdirectcostsincurredbythelessee,and
d)anestimateofcoststobeincurredbythelesseeindismantlingandremovingthe
underlyingasset,restoringthesiteonwhichitislocatedorrestoringtheunderlying
assettotheconditionrequiredbythetermsandconditionsofthelease,unlessthose
costsareincurredtoproduceinventories.
Right-of-use asset
Initialdirectcosts:Incrementalcostsofobtainingaleasethatwouldhavenotbeen
incurredifleasehadnotbeenobtained,exceptforsuchcostsincurredbya
manufacturerordealerlessorinconnectionwithafinancelease.Forexample,
brokerage.
Restorationcosts:Thelesseeincurstheobligationforrestorationcostseitheratthe
commencementdateorasaconsequenceofhavingusedtheunderlyingassetduring
aparticularperiod.Suchrestorationcostsarerecognisedaspartoftheright-of-use
assetandtheestimatedliabilityisrecognisedasprovision.Itisnotincludedaspart
oftheleaseliability.
18
Subsequent measurement of the right-of-use asset
Afterthecommencementdate,alesseeshallmeasuretheright-of-useassetapplyinga
costmodel,unlessitappliestherevaluationmodel.
Recognition and Measurement by Lessee
Cost model Revaluation model
Right-of-useassetismeasuredatcost:
a)lessanyaccumulateddepreciationand
anyaccumulatedimpairmentlosses,
and
b)adjustedforanyremeasurementofthe
leaseliability.
Depreciation:ApplyIndAS-16to
depreciateright-of-useasset.
Impairment:ApplyIndAS-36to
determinewhethertheright-of-use
assetisimpairedandtoaccountforany
impairmentlossidentified.
Ifright-of-useassetsrelatetoaclassof
property,plantandequipmenttowhich
thelesseeappliestherevaluationmodel
inIndAS16,alesseemayelect(i.e.
option)toapplythatrevaluationmodel
toalloftheright-of-useassetsthat
relatetothatclassofproperty,plantand
equipment.
Theelectioncanbemadeonaclass-by-
classbasis.
Subsequent measurement of the right-of-use asset
Afterthecommencementdate,alesseeshallmeasuretheright-of-useassetapplyinga
costmodel,unlessitappliestherevaluationmodel.
Recognition and Measurement by Lessee
Cost model Revaluation model
Right-of-useassetismeasuredatcost:
a)lessanyaccumulateddepreciationand
anyaccumulatedimpairmentlosses,
and
b)adjustedforanyremeasurementofthe
leaseliability.
Depreciation:ApplyIndAS-16to
depreciateright-of-useasset.
Impairment:ApplyIndAS-36to
determinewhethertheright-of-use
assetisimpairedandtoaccountforany
impairmentlossidentified.
Ifright-of-useassetsrelatetoaclassof
property,plantandequipmenttowhich
thelesseeappliestherevaluationmodel
inIndAS16,alesseemayelect(i.e.
option)toapplythatrevaluationmodel
toalloftheright-of-useassetsthat
relatetothatclassofproperty,plantand
equipment.
Theelectioncanbemadeonaclass-by-
classbasis.
19
Subsequent measurement of the lease liability
Afterthecommencementdate,alesseeshallmeasuretheleaseliabilityby:
a)increasingthecarryingamounttoreflectinterestontheleaseliability,
b)reducingthecarryingamounttoreflecttheleasepaymentsmade,and
c)adjustedforanyremeasurementoftheleaseliabilityorleasemodifications.
Alesseeshallremeasuretheleaseliabilityifthereischangein:
a)leaseterm,or
b)leasepayments,or
c)discountrate.
Alesseeshallrecognisetheamountoftheremeasurementoftheleaseliabilityasan
adjustmenttotheright-of-useasset.However,ifthecarryingamountoftheright-of-useasset
isreducedtozeroandthereisafurtherreductioninthemeasurementoftheleaseliability,a
lesseeshallrecogniseanyremainingamountoftheremeasurementinprofitorloss.
Leasemodification:Achangeinthescopeofthelease,ortheconsiderationforthelease,
thatwasnotpartoftheoriginaltermsandconditionsofthelease.
•Forexample:
1.Addingorterminatingtherighttouseoneormoreunderlyingassets.
2.Extendingorshorteningthecontractualleaseterm.
Recognition and Measurement by Lessee
Subsequent measurement of the lease liability
Afterthecommencementdate,alesseeshallmeasuretheleaseliabilityby:
a)increasingthecarryingamounttoreflectinterestontheleaseliability,
b)reducingthecarryingamounttoreflecttheleasepaymentsmade,and
c)adjustedforanyremeasurementoftheleaseliabilityorleasemodifications.
Alesseeshallremeasuretheleaseliabilityifthereischangein:
a)leaseterm,or
b)leasepayments,or
c)discountrate.
Alesseeshallrecognisetheamountoftheremeasurementoftheleaseliabilityasan
adjustmenttotheright-of-useasset.However,ifthecarryingamountoftheright-of-useasset
isreducedtozeroandthereisafurtherreductioninthemeasurementoftheleaseliability,a
lesseeshallrecogniseanyremainingamountoftheremeasurementinprofitorloss.
Leasemodification:Achangeinthescopeofthelease,ortheconsiderationforthelease,
thatwasnotpartoftheoriginaltermsandconditionsofthelease.
•Forexample:
1.Addingorterminatingtherighttouseoneormoreunderlyingassets.
2.Extendingorshorteningthecontractualleaseterm.
Recognition and Measurement by Lessee
Alesseeisexemptfromleaserecognitioninthefollowingcases:
a)short-termleases,and
b)leasesforwhichtheunderlyingassetisoflowvalue.
Thelesseeshallrecognisetheleasepaymentsassociatedwithabovementionedleasesasanexpense
overtheleasetermoneitherastraight-linebasisoranothersystematicbasis.
Recognition exemptions
20
Short-term leases Leases of low value assets
Short-termlease:Aleasethat,atthecommencementdate,
hasaleasetermof12monthsorless.
Aleasethatcontainsapurchaseoptionisnotashort-term
lease.
Theelectionforshort-termleasesshallbemadebyclassof
underlyingassettowhichtherightofuserelates.
Aclassofunderlyingassetisagroupingofunderlying
assetsofasimilarnatureanduseinanentity’soperations.
•Example-Anentityenteredintoleasecontractforseveral
itemsofofficeequipment–someforlessthan12months
andsomeformorethan12months,withnonecontaining
purchaseoptions.Assumingthattheitemsofoffice
equipmentareallconsideredtobeofthesameclass,ifthe
entitywishestousetheshorttermleaseexemptionitmust
applythatexemptionforalloftheleaseswithtermsof12
monthsorless.Theleaseswithtermsmorethan12months
willbeaccountedinaccordancewiththegeneral
recognitionandmeasurementrequirementsforlessee.
Lowvalueasset:Anunderlyingassetcanbeoflow
valueonlyif:
a)thelesseecanbenefitfromuseofthe
underlyingassetonitsownortogetherwith
otherresourcesthatarereadilyavailableto
thelessee,and
b)theunderlyingassetisnothighlydependent
on,orhighlyinterrelatedwith,otherassets.
Alesseeshallassessthevalueofanunderlyingasset
basedonthevalueoftheassetwhenitisnew.Value
amountinghowmuchrupeesisnotspecified.
•Examplesoflow-valueassetsaretablet,personal
computers,smallitemsofofficefurniture,telephones,
etc.
Theelectionforleasesoflowvalueassetscanbemade
onalease-by-leasebasis.
a)short-termleases,and
b)leasesforwhichtheunderlyingassetisoflowvalue.
Thelesseeshallrecognisetheleasepaymentsassociatedwithabovementionedleasesasanexpense
overtheleasetermoneitherastraight-linebasisoranothersystematicbasis.
Recognition exemptions
20
Short-term leases Leases of low value assets
Short-termlease:Aleasethat,atthecommencementdate,
hasaleasetermof12monthsorless.
Aleasethatcontainsapurchaseoptionisnotashort-term
lease.
Theelectionforshort-termleasesshallbemadebyclassof
underlyingassettowhichtherightofuserelates.
Aclassofunderlyingassetisagroupingofunderlying
assetsofasimilarnatureanduseinanentity’soperations.
•Example-Anentityenteredintoleasecontractforseveral
itemsofofficeequipment–someforlessthan12months
andsomeformorethan12months,withnonecontaining
purchaseoptions.Assumingthattheitemsofoffice
equipmentareallconsideredtobeofthesameclass,ifthe
entitywishestousetheshorttermleaseexemptionitmust
applythatexemptionforalloftheleaseswithtermsof12
monthsorless.Theleaseswithtermsmorethan12months
willbeaccountedinaccordancewiththegeneral
recognitionandmeasurementrequirementsforlessee.
Lowvalueasset:Anunderlyingassetcanbeoflow
valueonlyif:
a)thelesseecanbenefitfromuseofthe
underlyingassetonitsownortogetherwith
otherresourcesthatarereadilyavailableto
thelessee,and
b)theunderlyingassetisnothighlydependent
on,orhighlyinterrelatedwith,otherassets.
Alesseeshallassessthevalueofanunderlyingasset
basedonthevalueoftheassetwhenitisnew.Value
amountinghowmuchrupeesisnotspecified.
•Examplesoflow-valueassetsaretablet,personal
computers,smallitemsofofficefurniture,telephones,
etc.
Theelectionforleasesoflowvalueassetscanbemade
onalease-by-leasebasis.
Separating components of a contract –lease / non-lease
Anentityshallaccountforeachleasecomponentwithinthecontractasaleaseseparately
fromnon-leasecomponentsofthecontract,unlesstheentityappliesthepractical
expedient.
Asapracticalexpedient,alesseemayelect,byclassofunderlyingasset,nottoseparate
non-leasecomponentsfromleasecomponents,andinsteadaccountforeachlease
componentandanyassociatednon-leasecomponentsasasingleleasecomponent.
Therighttouseanunderlyingassetisaseparateleasecomponentifboth:
a)thelesseecanbenefitfromuseoftheunderlyingasseteitheronitsownortogether
withotherresourcesthatarereadilyavailabletothelessee,and
b)theunderlyingassetisneitherhighlydependenton,norhighlyinterrelatedwith,the
otherunderlyingassetsinthecontract.(Sameaslowvalueasset)
Examples:
•Acontractforleaseofacarincludeitsmaintenanceservices.
•Asinglecontractmayincludeleasesofland,buildingsandequipment.
Alesseeshallaccountfornon-leasecomponentsapplyingotherapplicablestandardsif
practicalexpedientisnotapplied.
21
Anentityshallaccountforeachleasecomponentwithinthecontractasaleaseseparately
fromnon-leasecomponentsofthecontract,unlesstheentityappliesthepractical
expedient.
Asapracticalexpedient,alesseemayelect,byclassofunderlyingasset,nottoseparate
non-leasecomponentsfromleasecomponents,andinsteadaccountforeachlease
componentandanyassociatednon-leasecomponentsasasingleleasecomponent.
Therighttouseanunderlyingassetisaseparateleasecomponentifboth:
a)thelesseecanbenefitfromuseoftheunderlyingasseteitheronitsownortogether
withotherresourcesthatarereadilyavailabletothelessee,and
b)theunderlyingassetisneitherhighlydependenton,norhighlyinterrelatedwith,the
otherunderlyingassetsinthecontract.(Sameaslowvalueasset)
Examples:
•Acontractforleaseofacarincludeitsmaintenanceservices.
•Asinglecontractmayincludeleasesofland,buildingsandequipment.
Alesseeshallaccountfornon-leasecomponentsapplyingotherapplicablestandardsif
practicalexpedientisnotapplied.
21
22
Transition
Asapracticalexpedient,anentityisnotrequiredtoreassesswhetheracontractis,or
contains,alease.Instead,theentityispermitted:
a)toapplythisStandardtocontractsthatwerepreviouslyidentifiedasleasesapplying
IndAS17Leases.Theentityshallapplythetransitionrequirementstotheseleases.
b)nottoapplythisStandardtocontractsthatwerenotpreviouslyidentifiedas
containingaleaseapplyingIndAS17.
Ifanentitychoosestoapplythispracticalexpedient,itshall
•disclosethatfactand
•applythepracticalexpedienttoallofitscontracts.
•Asaresult,theentityshallapplytherequirementsofthisstandardregardingthe
identificationofleasesonlytocontractsenteredinto(orchanged)onorafterthedate
ofinitialapplication.
Transition
Asapracticalexpedient,anentityisnotrequiredtoreassesswhetheracontractis,or
contains,alease.Instead,theentityispermitted:
a)toapplythisStandardtocontractsthatwerepreviouslyidentifiedasleasesapplying
IndAS17Leases.Theentityshallapplythetransitionrequirementstotheseleases.
b)nottoapplythisStandardtocontractsthatwerenotpreviouslyidentifiedas
containingaleaseapplyingIndAS17.
Ifanentitychoosestoapplythispracticalexpedient,itshall
•disclosethatfactand
•applythepracticalexpedienttoallofitscontracts.
•Asaresult,theentityshallapplytherequirementsofthisstandardregardingthe
identificationofleasesonlytocontractsenteredinto(orchanged)onorafterthedate
ofinitialapplication.
23
Transition
AlesseeshallapplythisStandardtoallofitsexistingleaseseither:
a)retrospectivelytoeachpriorreportingperiodpresentedapplyingIndAS8Accounting
Policies,ChangesinAccountingEstimatesandErrors(i.e.fullretrospectiveapproach),or
b)retrospectivelywiththecumulativeeffectofinitiallyapplyingtheStandardrecognisedat
thedateofinitialapplication(i.e.modifiedretrospectiveapproachorcumulativecatch-up
approach).
Ifalesseeelectstoapplymodifiedretrospectiveapproach,thelesseeshall:
a)recognisealeaseliabilitywhichcanbemeasuredatthepresentvalueoftheremaining
leasepayments,discountedusingthelessee’sincrementalborrowingrate.
b)recognisearight-of-useassetwhichcanbemeasured,onalease-by-leasebasis,ateither:
i.itscarryingamountasiftheStandardhadbeenappliedsincethecommencement
date,butdiscountedusingthelessee’sincrementalborrowingrate,or
ii.anamountequaltotheleaseliability,adjustedbytheamountofanyprepaidor
accruedleasepayments.
c)notrestatecomparativeinformation.Instead,thelesseeshallrecognisethecumulative
effectofinitiallyapplyingthisStandardasanadjustmenttotheopeningbalanceof
retainedearnings.
Transition
AlesseeshallapplythisStandardtoallofitsexistingleaseseither:
a)retrospectivelytoeachpriorreportingperiodpresentedapplyingIndAS8Accounting
Policies,ChangesinAccountingEstimatesandErrors(i.e.fullretrospectiveapproach),or
b)retrospectivelywiththecumulativeeffectofinitiallyapplyingtheStandardrecognisedat
thedateofinitialapplication(i.e.modifiedretrospectiveapproachorcumulativecatch-up
approach).
Ifalesseeelectstoapplymodifiedretrospectiveapproach,thelesseeshall:
a)recognisealeaseliabilitywhichcanbemeasuredatthepresentvalueoftheremaining
leasepayments,discountedusingthelessee’sincrementalborrowingrate.
b)recognisearight-of-useassetwhichcanbemeasured,onalease-by-leasebasis,ateither:
i.itscarryingamountasiftheStandardhadbeenappliedsincethecommencement
date,butdiscountedusingthelessee’sincrementalborrowingrate,or
ii.anamountequaltotheleaseliability,adjustedbytheamountofanyprepaidor
accruedleasepayments.
c)notrestatecomparativeinformation.Instead,thelesseeshallrecognisethecumulative
effectofinitiallyapplyingthisStandardasanadjustmenttotheopeningbalanceof
retainedearnings.
24
Full retrospective approach or modified retrospective approach?
An entity shall apply either of the option to its ALL leases.
Option 1 –Full retrospective
•Restate comparatives as
if Ind AS 116 always
applied
Option 2 –Modified retrospective
•Comparativeamountsarenotrestated
•Anydifferencebetweenassetandliabilityrecognised
inopeningretainedearningsatthedateoftransition
•Carryforwardexistingfinanceleaseliabilities
•Calculateoutstandingliabilityforexistingoperating
leasesusinglessee’sincrementalborrowingrateat
thedateoftransition
•Choosehowtomeasureright-of-useassetonlease-
by-leasebasis:
Option 2A –
Measureright-of-use
assetasifIndAS116
hadbeenappliedfrom
leasecommencement
datebutusinglessee’s
incrementalborrowing
rateatdateoftransition
Option 2B –
Measureright-of-useasset
atamountequaltolease
liability(adjustedfor
accrualsandprepayments)
Transition
Full retrospective approach or modified retrospective approach?
An entity shall apply either of the option to its ALL leases.
Option 1 –Full retrospective
•Restate comparatives as
if Ind AS 116 always
applied
Option 2 –Modified retrospective
•Comparativeamountsarenotrestated
•Anydifferencebetweenassetandliabilityrecognised
inopeningretainedearningsatthedateoftransition
•Carryforwardexistingfinanceleaseliabilities
•Calculateoutstandingliabilityforexistingoperating
leasesusinglessee’sincrementalborrowingrateat
thedateoftransition
•Choosehowtomeasureright-of-useassetonlease-
by-leasebasis:
Option 2A –
Measureright-of-use
assetasifIndAS116
hadbeenappliedfrom
leasecommencement
datebutusinglessee’s
incrementalborrowing
rateatdateoftransition
Option 2B –
Measureright-of-useasset
atamountequaltolease
liability(adjustedfor
accrualsandprepayments)
Transition
25
Transition
Option1
TheliabilityandassetarebothcalculatedasifIndAS116hadalwaysbeenapplied,withcomparative
amountsrestated.Theliabilityonthecommencementdateoftheleaseiscalculatedasthepresentvalue
ofthefuturerentals,discountedusingarateof8percent.
TheimpactonthebalancesheetasatthedateoftransitionisareductioninnetassetsofRs.19,598(asset
ofRs.2,58,728andliabilityofRs.2,78,326),withanexpenseofRs.2,80,402recognisedinthestatementof
profitandlosspost-transition.
Date Asset Liability Total expense
Lease commencement –1April2017 4,31,213 4,31,213
Year ended 31 March 2018 3,44,970 3,57,710 1,12,740
Year ended 31 March 2019 2,58,728 2,78,326 1,06,859
Amounts recognised at transition on 1 April 2019 2,58,728 2,78,326
Year ended 31 March 2020 1,72,485 1,92,593 1,00,509
Year ended 31 March 2021 86,243 1,00,000 93,650
Year ended 31 March 2022 0 0 86,243
Total expense post-transition 2,80,402
Example:
•5-year lease, entered into on 1 April 2017,
•Rs.1,00,000 payable on the beginning of each year,
•8 per cent discount rate at lease commencement,
•12 per cent incremental borrowing rate at date of transition, and
•straight-line depreciation of the right-of-use asset is appropriate.
Transition
Option1
TheliabilityandassetarebothcalculatedasifIndAS116hadalwaysbeenapplied,withcomparative
amountsrestated.Theliabilityonthecommencementdateoftheleaseiscalculatedasthepresentvalue
ofthefuturerentals,discountedusingarateof8percent.
TheimpactonthebalancesheetasatthedateoftransitionisareductioninnetassetsofRs.19,598(asset
ofRs.2,58,728andliabilityofRs.2,78,326),withanexpenseofRs.2,80,402recognisedinthestatementof
profitandlosspost-transition.
Date Asset Liability Total expense
Lease commencement –1April2017 4,31,213 4,31,213
Year ended 31 March 2018 3,44,970 3,57,710 1,12,740
Year ended 31 March 2019 2,58,728 2,78,326 1,06,859
Amounts recognised at transition on 1 April 2019 2,58,728 2,78,326
Year ended 31 March 2020 1,72,485 1,92,593 1,00,509
Year ended 31 March 2021 86,243 1,00,000 93,650
Year ended 31 March 2022 0 0 86,243
Total expense post-transition 2,80,402
Example:
•5-year lease, entered into on 1 April 2017,
•Rs.1,00,000 payable on the beginning of each year,
•8 per cent discount rate at lease commencement,
•12 per cent incremental borrowing rate at date of transition, and
•straight-line depreciation of the right-of-use asset is appropriate.
26
Transition
Option2A
Comparativeamountsarenotrestatedandtheliabilityiscalculatedasthepresentvalueofthethree
outstandingrentalsofRs.1,00,000,discountedusingtheincrementalborrowingrateatthedateoftransition
of12percent.
TheassetiscalculatedasifIndAS116hadalwaysbeenapplied,butusingtheincrementalborrowingrateat
thedateoftransitionof12percent.
TheimpactonthebalancesheetasatthedateoftransitionisareductioninnetassetsofRs.26,764(assetof
Rs.2,42,241andliabilityofRs.2,69,005),withanexpenseofRs.2,73,236recognisedinthestatementofprofit
andlosspost-transition.
Date Asset LiabilityTotal expense
Lease commencement –1April2017 4,03,735
Year ended 31 March 2018 3,22,988
Year ended 31 March 2019 2,42,241
Amounts recognised at transition on 1 April
2019
2,42,241 2,69,005
Year ended 31 March 2020 1,61,494 1,89,286 1,01,028
Year ended 31 March 2021 80,747 1,00,000 91,461
Year ended 31 March 2022 0 0 80,747
Total expense post-transition 2,73,236
Transition
Option2A
Comparativeamountsarenotrestatedandtheliabilityiscalculatedasthepresentvalueofthethree
outstandingrentalsofRs.1,00,000,discountedusingtheincrementalborrowingrateatthedateoftransition
of12percent.
TheassetiscalculatedasifIndAS116hadalwaysbeenapplied,butusingtheincrementalborrowingrateat
thedateoftransitionof12percent.
TheimpactonthebalancesheetasatthedateoftransitionisareductioninnetassetsofRs.26,764(assetof
Rs.2,42,241andliabilityofRs.2,69,005),withanexpenseofRs.2,73,236recognisedinthestatementofprofit
andlosspost-transition.
Date Asset LiabilityTotal expense
Lease commencement –1April2017 4,03,735
Year ended 31 March 2018 3,22,988
Year ended 31 March 2019 2,42,241
Amounts recognised at transition on 1 April
2019
2,42,241 2,69,005
Year ended 31 March 2020 1,61,494 1,89,286 1,01,028
Year ended 31 March 2021 80,747 1,00,000 91,461
Year ended 31 March 2022 0 0 80,747
Total expense post-transition 2,73,236
27
Transition
Option 2B
Comparativeamountsarenotrestatedandtheliabilityiscalculatedasthepresentvalueofthe
threeoutstandingrentalsofRs.1,00,000,discountedusingtheincrementalborrowingrateat
thedateoftransitionof12percent.Theassetisthensetequaltotheliability.
The net impact on the balance sheet as at the date of transition is nil (asset = liability) but the
expense post-transition is Rs.3,00,000.
Date Asset LiabilityTotal expense
Amounts recognised at transition on 1 April
2019
2,69,005 2,69,005
Year ended 31 March 2020 1,79,337 1,89,286 1,09,949
Year ended 31 March 2021 89,668 1,00,000 1,00,383
Year ended 31 March 2022 0 0 89,668
Total expense post-transition 3,00,000
Comparisonoftransitionoptions
Options1and2Abothreducenetassets(retainedearnings)ontransitionwhereasOption2B
leadstonilimpactonnetassetsbut,becausetheassetissethigherinOption2Bthanunder
otheroptions,theexpensepost-transitionishigherinOption2Bascomparedtoother
options.
Transition
Option 2B
Comparativeamountsarenotrestatedandtheliabilityiscalculatedasthepresentvalueofthe
threeoutstandingrentalsofRs.1,00,000,discountedusingtheincrementalborrowingrateat
thedateoftransitionof12percent.Theassetisthensetequaltotheliability.
The net impact on the balance sheet as at the date of transition is nil (asset = liability) but the
expense post-transition is Rs.3,00,000.
Date Asset LiabilityTotal expense
Amounts recognised at transition on 1 April
2019
2,69,005 2,69,005
Year ended 31 March 2020 1,79,337 1,89,286 1,09,949
Year ended 31 March 2021 89,668 1,00,000 1,00,383
Year ended 31 March 2022 0 0 89,668
Total expense post-transition 3,00,000
Comparisonoftransitionoptions
Options1and2Abothreducenetassets(retainedearnings)ontransitionwhereasOption2B
leadstonilimpactonnetassetsbut,becausetheassetissethigherinOption2Bthanunder
otheroptions,theexpensepost-transitionishigherinOption2Bascomparedtoother
options.
28
Undermodifiedretrospectiveapproach,alesseeispermittedtoapplythefollowing
practicalexpedientsonalease-by-leasebasis:
a)alesseemayapplyasinglediscountratetoaportfolioofleaseswithreasonably
similarcharacteristics.
b)alesseeisnotrequiredtomakeanyadjustmentsontransitionforleaseswhoselease
termendswithin12monthsfromtransitiondate(short-termleases).
c)alesseemayexcludeinitialdirectcostsfromthemeasurementoftheright-of-use
asset.
d)alesseemayusehindsight,suchasindeterminingtheleasetermifthecontract
containsoptionstoextendorterminatethelease.
Undermodifiedretrospectiveapproach,alesseeisnotrequiredtomakeanyadjustments
ontransitionforleasesoflowvalueassetsifrecognitionexemptionisselected.
Undermodifiedretrospectiveapproach,incaseoffinancelease,alesseeisrequiredto
carryforwardthesamebalancesofleaseassetsandleaseliabilities.
Transition
Undermodifiedretrospectiveapproach,alesseeispermittedtoapplythefollowing
practicalexpedientsonalease-by-leasebasis:
a)alesseemayapplyasinglediscountratetoaportfolioofleaseswithreasonably
similarcharacteristics.
b)alesseeisnotrequiredtomakeanyadjustmentsontransitionforleaseswhoselease
termendswithin12monthsfromtransitiondate(short-termleases).
c)alesseemayexcludeinitialdirectcostsfromthemeasurementoftheright-of-use
asset.
d)alesseemayusehindsight,suchasindeterminingtheleasetermifthecontract
containsoptionstoextendorterminatethelease.
Undermodifiedretrospectiveapproach,alesseeisnotrequiredtomakeanyadjustments
ontransitionforleasesoflowvalueassetsifrecognitionexemptionisselected.
Undermodifiedretrospectiveapproach,incaseoffinancelease,alesseeisrequiredto
carryforwardthesamebalancesofleaseassetsandleaseliabilities.
Transition
29
Sr. No. Ind AS 17 Ind AS 116
1. IndAS17definesleaseasanagreement
wherebythelessorconveystothe
lesseeinreturnforapaymentorseries
ofpaymentstherighttouseanasset
foranagreedperiodoftime.
IndAS116definesleaseasacontract,or
partofacontract,thatconveystherightto
controltheuseofanunderlyingassetfora
periodoftimeinexchangefor
consideration.
2. IndAS17requiredleasestobe
classifiedasfinanceleaseand
operatinglease.Itspecifiesseparate
accountingmodelforleaseclassifiedas
operatingleaseandfinancelease.
IndAS116introducesasinglelessee
accountingmodelandrequiresalesseeto
recognisearight-of-useassetandalease
liabilityforallleaseswithatermofmore
than12months,unlesstheunderlyingasset
isoflowvalue.
3. UnderIndAS17,lesseeincaseof
operatingleaseisrequiredtorecognise
theleasepaymentsasexpenseeither
onastraight-linebasisoranother
systematicbasis.
UnderIndAS116,alesseemeasuresright-
of-useassetandleaseliability.Asa
consequence,alesseerecognises
depreciationontheright-of-useassetand
interestontheleaseliability.
4. IndAS17doesnotspecificallyprovide
foraccountingofleasemodification.
IndAS116containsspecificprovisionfor
accountingofleasemodificationbylessee
andlessor.
Ind AS 17 vs Ind AS 116
Sr. No. Ind AS 17 Ind AS 116
1. IndAS17definesleaseasanagreement
wherebythelessorconveystothe
lesseeinreturnforapaymentorseries
ofpaymentstherighttouseanasset
foranagreedperiodoftime.
IndAS116definesleaseasacontract,or
partofacontract,thatconveystherightto
controltheuseofanunderlyingassetfora
periodoftimeinexchangefor
consideration.
2. IndAS17requiredleasestobe
classifiedasfinanceleaseand
operatinglease.Itspecifiesseparate
accountingmodelforleaseclassifiedas
operatingleaseandfinancelease.
IndAS116introducesasinglelessee
accountingmodelandrequiresalesseeto
recognisearight-of-useassetandalease
liabilityforallleaseswithatermofmore
than12months,unlesstheunderlyingasset
isoflowvalue.
3. UnderIndAS17,lesseeincaseof
operatingleaseisrequiredtorecognise
theleasepaymentsasexpenseeither
onastraight-linebasisoranother
systematicbasis.
UnderIndAS116,alesseemeasuresright-
of-useassetandleaseliability.Asa
consequence,alesseerecognises
depreciationontheright-of-useassetand
interestontheleaseliability.
4. IndAS17doesnotspecificallyprovide
foraccountingofleasemodification.
IndAS116containsspecificprovisionfor
accountingofleasemodificationbylessee
andlessor.
Ind AS 17 vs Ind AS 116
30
CompanyP(Lessee)enterintoaleasearrangementforaperiodof5yearswithCompanyQ(Lessor)for
occupyinglessor’swarehouse.TheleaserentalisRs.1,50,000peryear.Theinterestrateimplicitinthe
leaseis5%perannum.Itisassumedthattherearenoothertermsintheleasearrangement.
ThenetpresentvalueofleaserentalsofRs.1,50,000foraperiodof5yearsat5%discountrate
amountstoRs.6,49,422.
Onthecommencementdate,CompanyPrecognisesaleaseliabilityandright-of-useassetsof
Rs.6,49,422initsbalancesheet.Thebelowtablesummarisesthetreatmentofabovelease
arrangementunderIndAS116inBalanceSheetandStatementofProfitandLossoflessee.
Example explaining accounting by Lessee
Lease Liability Right-of-use Asset
Period Opening
Balance
Lease
Payment
Interest
Expenses
Closing
Balance
Opening
Balance
DepreciationClosing
Balance
Column 1 2 3 (1*5%) 4 (1-2+3) 5 6 7 (5-6)
At Inception 6,49,422 - - 6,49,422 6,49,422 - 6,49,422
Year 1 6,49,422 (1,50,000) 32,471 5,31,893 6,49,422 (1,29,884) 5,19,538
Year 2 5,31,893 (1,50,000) 26,595 4,08,488 5,19,538 (1,29,884) 3,89,654
Year 3 4,08,488 (1,50,000) 20,424 2,78,912 3,89,654 (1,29,884) 2,59,770
Year 4 2,78,912 (1,50,000) 13,946 1,42,858 2,59,770 (1,29,884) 1,29,886
Year 5 1,42,858 (1,50,000) 7,142 - 1,29,886 (1,29,886) -
Total 7,50,000 100,578 649,422
Amount in Rs.
CompanyP(Lessee)enterintoaleasearrangementforaperiodof5yearswithCompanyQ(Lessor)for
occupyinglessor’swarehouse.TheleaserentalisRs.1,50,000peryear.Theinterestrateimplicitinthe
leaseis5%perannum.Itisassumedthattherearenoothertermsintheleasearrangement.
ThenetpresentvalueofleaserentalsofRs.1,50,000foraperiodof5yearsat5%discountrate
amountstoRs.6,49,422.
Onthecommencementdate,CompanyPrecognisesaleaseliabilityandright-of-useassetsof
Rs.6,49,422initsbalancesheet.Thebelowtablesummarisesthetreatmentofabovelease
arrangementunderIndAS116inBalanceSheetandStatementofProfitandLossoflessee.
Example explaining accounting by Lessee
Lease Liability Right-of-use Asset
Period Opening
Balance
Lease
Payment
Interest
Expenses
Closing
Balance
Opening
Balance
DepreciationClosing
Balance
Column 1 2 3 (1*5%) 4 (1-2+3) 5 6 7 (5-6)
At Inception 6,49,422 - - 6,49,422 6,49,422 - 6,49,422
Year 1 6,49,422 (1,50,000) 32,471 5,31,893 6,49,422 (1,29,884) 5,19,538
Year 2 5,31,893 (1,50,000) 26,595 4,08,488 5,19,538 (1,29,884) 3,89,654
Year 3 4,08,488 (1,50,000) 20,424 2,78,912 3,89,654 (1,29,884) 2,59,770
Year 4 2,78,912 (1,50,000) 13,946 1,42,858 2,59,770 (1,29,884) 1,29,886
Year 5 1,42,858 (1,50,000) 7,142 - 1,29,886 (1,29,886) -
Total 7,50,000 100,578 649,422
Amount in Rs.
31
Amount in Rs.
*(Positivefiguresandfiguresinthebracketindicatefavorableandadverseimpactrespectivelyon
amountofnetincome/EBITDAunderIndAS116ascomparedtoIndAS17).
Asperaboveexample,whereasunderIndAS116,CompanyPrecognisesinterestexpensesonlease
liabilityanddepreciationonright-of-useassetsinthestatementofprofitandloss,itwouldrecognise
theoperatingleaserentalexpensesunderIndAS17asapartofoperatingexpenses.Accordingly,Ind
AS116isexpectedtohaveafavorableimpactonEBITDAascomparedtoIndAS17.
Further,whileintheinitialyearsthetotalexpensescomprisingofdepreciationandinterestexpense
underIndAS116isexpectedtobehigherascomparedtoleaserentalexpenseunderIndAS17,the
totalexpensesovertheleasetermunderIndAS116andIndAS17willremainatthesamelevel.
Impact analysis of Ind AS 116 as compared to Ind AS 17
As per Ind AS 116 Ind AS 17
Period Interest
Expense
DepreciationTotal ExpensesLease rental
Expenses
Impact on Net
Income*
Impact on
EBITDA*
Column 1 2 3 (1+2) 4 5 (4-3) 6
Year 1 32,471 1,29,884 1,62,355 1,50,000 (12,355) 1,62,355
Year 2 26,595 1,29,884 1,56,479 1,50,000 (6,479) 1,56,479
Year 3 20,424 1,29,884 1,50,308 1,50,000 (308) 1,50,308
Year 4 13,946 1,29,884 1,43,830 1,50,000 6170 1,43,830
Year 5 7,142 1,29,886 1,37,028 1,50,000 12,972 1,37,028
Total 1,00,578 6,49,422 7,50,000 7,50,000 - 7,50,000
Amount in Rs.
*(Positivefiguresandfiguresinthebracketindicatefavorableandadverseimpactrespectivelyon
amountofnetincome/EBITDAunderIndAS116ascomparedtoIndAS17).
Asperaboveexample,whereasunderIndAS116,CompanyPrecognisesinterestexpensesonlease
liabilityanddepreciationonright-of-useassetsinthestatementofprofitandloss,itwouldrecognise
theoperatingleaserentalexpensesunderIndAS17asapartofoperatingexpenses.Accordingly,Ind
AS116isexpectedtohaveafavorableimpactonEBITDAascomparedtoIndAS17.
Further,whileintheinitialyearsthetotalexpensescomprisingofdepreciationandinterestexpense
underIndAS116isexpectedtobehigherascomparedtoleaserentalexpenseunderIndAS17,the
totalexpensesovertheleasetermunderIndAS116andIndAS17willremainatthesamelevel.
Impact analysis of Ind AS 116 as compared to Ind AS 17
As per Ind AS 116 Ind AS 17
Period Interest
Expense
DepreciationTotal ExpensesLease rental
Expenses
Impact on Net
Income*
Impact on
EBITDA*
Column 1 2 3 (1+2) 4 5 (4-3) 6
Year 1 32,471 1,29,884 1,62,355 1,50,000 (12,355) 1,62,355
Year 2 26,595 1,29,884 1,56,479 1,50,000 (6,479) 1,56,479
Year 3 20,424 1,29,884 1,50,308 1,50,000 (308) 1,50,308
Year 4 13,946 1,29,884 1,43,830 1,50,000 6170 1,43,830
Year 5 7,142 1,29,886 1,37,028 1,50,000 12,972 1,37,028
Total 1,00,578 6,49,422 7,50,000 7,50,000 - 7,50,000
32
Alessorshallclassifyeachofitsleasesaseitheranoperatingleaseorafinancelease.
Financelease:Aleaseisclassifiedasafinanceleaseifittransferssubstantiallyallthe
risksandrewardsincidentaltoownershipofanunderlyingasset.
Operatinglease:Aleaseisclassifiedasanoperatingleaseifitdoesnottransfer
substantiallyalltherisksandrewardsincidentaltoownershipofanunderlyingasset.
oRisksincludethepossibilitiesoflossesfromidlecapacityortechnologicalobsolescence
andofvariationsinreturnbecauseofchangingeconomicconditions.
oRewardsmayberepresentedbytheexpectationofprofitableoperationoverthe
underlyingasset’seconomiclifeandofgainfromappreciationinvalueorrealisationofa
residualvalue.
Whetheraleaseisafinanceleaseoranoperatingleasedependsonthesubstanceofthe
transactionratherthantheformofthecontract.
Leaseclassificationismadeattheinceptiondateandisreassessedonlyifthereisalease
modification.
Classification of leases by Lessor
Whentheunderlyingassetwillbereturnedbythelesseetolessor,itisanoperatinglease.
Whentheunderlyingassetwillberetained(notreturned)bythelessee,itisafinancelease.
Alessorshallclassifyeachofitsleasesaseitheranoperatingleaseorafinancelease.
Financelease:Aleaseisclassifiedasafinanceleaseifittransferssubstantiallyallthe
risksandrewardsincidentaltoownershipofanunderlyingasset.
Operatinglease:Aleaseisclassifiedasanoperatingleaseifitdoesnottransfer
substantiallyalltherisksandrewardsincidentaltoownershipofanunderlyingasset.
oRisksincludethepossibilitiesoflossesfromidlecapacityortechnologicalobsolescence
andofvariationsinreturnbecauseofchangingeconomicconditions.
oRewardsmayberepresentedbytheexpectationofprofitableoperationoverthe
underlyingasset’seconomiclifeandofgainfromappreciationinvalueorrealisationofa
residualvalue.
Whetheraleaseisafinanceleaseoranoperatingleasedependsonthesubstanceofthe
transactionratherthantheformofthecontract.
Leaseclassificationismadeattheinceptiondateandisreassessedonlyifthereisalease
modification.
Classification of leases by Lessor
Whentheunderlyingassetwillbereturnedbythelesseetolessor,itisanoperatinglease.
Whentheunderlyingassetwillberetained(notreturned)bythelessee,itisafinancelease.
33
Primaryindicatorsofsituationsthatindividuallyorincombinationwouldnormallyleadtoalease
beingclassifiedasafinanceleaseare:
a)theleasetransfersownershipoftheunderlyingassettothelesseebytheendofthelease
term,
b)thelesseehastheoptiontopurchasetheunderlyingassetatapricethatisexpectedtobe
sufficientlylowerthanthefairvalueatthedatetheoptionbecomesexercisableforittobe
reasonablycertain,attheinceptiondate,thattheoptionwillbeexercised,
c)theleasetermisforthemajorpartoftheeconomiclifeoftheunderlyingassetevenif
titleisnottransferred,
d)attheinceptiondate,thepresentvalueoftheleasepaymentsamountstoatleast
substantiallyallofthefairvalueoftheunderlyingasset,and
e)theunderlyingassetisofsuchaspecialisednaturethatonlythelesseecanuseitwithout
majormodifications.
Additionalindicatorsofsituationsthatindividuallyorincombinationcouldalsoleadtoalease
beingclassifiedasafinanceleaseare:
a)ifthelesseecancancelthelease,thelessor’slossesassociatedwiththecancellationare
bornebythelessee,
b)gainsorlossesfromthefluctuationinthefairvalueoftheresidualaccruetothelessee(for
example,intheformofarentrebateequalingmostofthesalesproceedsattheendofthe
lease),and
c)thelesseehastheabilitytocontinuetheleaseforasecondaryperiodatarentthatis
substantiallylowerthanmarketrent.
Classification of leases by Lessor
Primaryindicatorsofsituationsthatindividuallyorincombinationwouldnormallyleadtoalease
beingclassifiedasafinanceleaseare:
a)theleasetransfersownershipoftheunderlyingassettothelesseebytheendofthelease
term,
b)thelesseehastheoptiontopurchasetheunderlyingassetatapricethatisexpectedtobe
sufficientlylowerthanthefairvalueatthedatetheoptionbecomesexercisableforittobe
reasonablycertain,attheinceptiondate,thattheoptionwillbeexercised,
c)theleasetermisforthemajorpartoftheeconomiclifeoftheunderlyingassetevenif
titleisnottransferred,
d)attheinceptiondate,thepresentvalueoftheleasepaymentsamountstoatleast
substantiallyallofthefairvalueoftheunderlyingasset,and
e)theunderlyingassetisofsuchaspecialisednaturethatonlythelesseecanuseitwithout
majormodifications.
Additionalindicatorsofsituationsthatindividuallyorincombinationcouldalsoleadtoalease
beingclassifiedasafinanceleaseare:
a)ifthelesseecancancelthelease,thelessor’slossesassociatedwiththecancellationare
bornebythelessee,
b)gainsorlossesfromthefluctuationinthefairvalueoftheresidualaccruetothelessee(for
example,intheformofarentrebateequalingmostofthesalesproceedsattheendofthe
lease),and
c)thelesseehastheabilitytocontinuetheleaseforasecondaryperiodatarentthatis
substantiallylowerthanmarketrent.
Classification of leases by Lessor
34
Finance leases -Recognition and measurement by Lessor
Initial recognition and measurement
Atthecommencementdate,alessorshallrecogniseassetsheldunderafinanceleaseinitsbalance
sheetandpresentthemasareceivableatanamountequaltothenetinvestmentinthelease.
Netinvestmentinthelease:Thegrossinvestmentintheleasediscountedattheinterestrate
implicitinthelease.
Grossinvestmentinthelease:Thesumof:(a)theleasepaymentsreceivablebyalessorundera
financeleaseand(b)anyunguaranteedresidualvalueaccruingtothelessor.
Thelessorshallusetheinterestrateimplicitintheleasetomeasurethenetinvestmentinthelease.
Atthecommencementdate,theleasepaymentsincludedinthemeasurementofthenetinvestmentin
theleasecomprisethefollowingpaymentsthatarenotreceived:
a)fixedpayments(includingin-substancefixedpayments),lessanyleaseincentivespayable,
b)variableleasepaymentsthatdependonanindexorarate,initiallymeasuredusingtheindexor
rateasatthecommencementdate,
c)anyresidualvalueguaranteesprovidedtothelessorbythelessee,apartyrelatedtothelesseeor
athirdpartyunrelatedtothelessorthatisfinanciallycapableofdischargingtheobligationsunder
theguarantee,
d)theexercisepriceofapurchaseoptionifthelesseeisreasonablycertaintoexercisethatoption,
and
e)paymentsofpenaltiesforterminatingthelease,iftheleasetermreflectsthelesseeexercisingan
optiontoterminatethelease.
Finance leases -Recognition and measurement by Lessor
Initial recognition and measurement
Atthecommencementdate,alessorshallrecogniseassetsheldunderafinanceleaseinitsbalance
sheetandpresentthemasareceivableatanamountequaltothenetinvestmentinthelease.
Netinvestmentinthelease:Thegrossinvestmentintheleasediscountedattheinterestrate
implicitinthelease.
Grossinvestmentinthelease:Thesumof:(a)theleasepaymentsreceivablebyalessorundera
financeleaseand(b)anyunguaranteedresidualvalueaccruingtothelessor.
Thelessorshallusetheinterestrateimplicitintheleasetomeasurethenetinvestmentinthelease.
Atthecommencementdate,theleasepaymentsincludedinthemeasurementofthenetinvestmentin
theleasecomprisethefollowingpaymentsthatarenotreceived:
a)fixedpayments(includingin-substancefixedpayments),lessanyleaseincentivespayable,
b)variableleasepaymentsthatdependonanindexorarate,initiallymeasuredusingtheindexor
rateasatthecommencementdate,
c)anyresidualvalueguaranteesprovidedtothelessorbythelessee,apartyrelatedtothelesseeor
athirdpartyunrelatedtothelessorthatisfinanciallycapableofdischargingtheobligationsunder
theguarantee,
d)theexercisepriceofapurchaseoptionifthelesseeisreasonablycertaintoexercisethatoption,
and
e)paymentsofpenaltiesforterminatingthelease,iftheleasetermreflectsthelesseeexercisingan
optiontoterminatethelease.
35
Finance leases -Recognition and measurement by Lessor
Subsequent measurement
Alessorshallrecognisefinanceincomeovertheleaseterm,basedonapatternreflectinga
constantperiodicrateofreturnonthelessor’snetinvestmentinthelease.
Alessorshallapplytheleasepaymentsrelatingtotheperiodagainstthegrossinvestment
intheleasetoreduceboththeprincipalandtheunearnedfinanceincome.
Operating leases -Recognition and measurement by Lessor
Alessorshallrecogniseleasepaymentsfromoperatingleasesasincomeoneithera
straight-linebasisoranothersystematicbasis.
Alessorshallrecognisecosts,includingdepreciation,incurredinearningtheleaseincome
asanexpense.
Alessorshalladdinitialdirectcostsincurredinobtaininganoperatingleasetothecarrying
amountoftheunderlyingassetandrecognisethosecostsasanexpenseoverthelease
termonthesamebasisastheleaseincome.
Finance leases -Recognition and measurement by Lessor
Subsequent measurement
Alessorshallrecognisefinanceincomeovertheleaseterm,basedonapatternreflectinga
constantperiodicrateofreturnonthelessor’snetinvestmentinthelease.
Alessorshallapplytheleasepaymentsrelatingtotheperiodagainstthegrossinvestment
intheleasetoreduceboththeprincipalandtheunearnedfinanceincome.
Operating leases -Recognition and measurement by Lessor
Alessorshallrecogniseleasepaymentsfromoperatingleasesasincomeoneithera
straight-linebasisoranothersystematicbasis.
Alessorshallrecognisecosts,includingdepreciation,incurredinearningtheleaseincome
asanexpense.
Alessorshalladdinitialdirectcostsincurredinobtaininganoperatingleasetothecarrying
amountoftheunderlyingassetandrecognisethosecostsasanexpenseoverthelease
termonthesamebasisastheleaseincome.
36
Sale and leaseback transactions
Ifanentity(theseller-lessee)transfersanassettoanotherentity(thebuyer-lessor)and
leasesthatassetbackfromthebuyer-lessor,boththeseller-lesseeandthebuyer-lessor
shallaccountforthetransfercontractandtheleaseapplyingbelowprinciples:
Whentransferofanassetisasale
Ifthetransferofanassetbytheseller-lesseesatisfiestherequirementsofIndAS115tobe
accountedforasasaleoftheasset:
a)theseller-lesseeshallmeasuretheright-of-useassetarisingfromtheleasebackatthe
proportionofthepreviouscarryingamountoftheassetthatrelatestotherightof
useretainedbytheseller-lessee.Accordingly,theseller-lesseeshallrecogniseonly
theamountofanygainorlossthatrelatestotherightstransferredtothebuyer-
lessor.
b)thebuyer-lessorshallaccountforthepurchaseoftheassetapplyingapplicable
Standards,andfortheleaseapplyingthelessoraccountingrequirementsinthis
Standard.
Whentransferofanassetisnotasale
Ifthetransferofanassetbytheseller-lesseedoesnotsatisfytherequirementsofIndAS
115tobeaccountedforasasaleoftheasset:
a)theseller-lesseeshallcontinuetorecognisethetransferredassetandshallrecognise
afinancialliabilityasperIndAS109equaltothetransferproceeds.
b)thebuyer-lessorshallnotrecognisethetransferredassetandshallrecognisea
financialassetasperIndAS109equaltothetransferproceeds.
Sale and leaseback transactions
Ifanentity(theseller-lessee)transfersanassettoanotherentity(thebuyer-lessor)and
leasesthatassetbackfromthebuyer-lessor,boththeseller-lesseeandthebuyer-lessor
shallaccountforthetransfercontractandtheleaseapplyingbelowprinciples:
Whentransferofanassetisasale
Ifthetransferofanassetbytheseller-lesseesatisfiestherequirementsofIndAS115tobe
accountedforasasaleoftheasset:
a)theseller-lesseeshallmeasuretheright-of-useassetarisingfromtheleasebackatthe
proportionofthepreviouscarryingamountoftheassetthatrelatestotherightof
useretainedbytheseller-lessee.Accordingly,theseller-lesseeshallrecogniseonly
theamountofanygainorlossthatrelatestotherightstransferredtothebuyer-
lessor.
b)thebuyer-lessorshallaccountforthepurchaseoftheassetapplyingapplicable
Standards,andfortheleaseapplyingthelessoraccountingrequirementsinthis
Standard.
Whentransferofanassetisnotasale
Ifthetransferofanassetbytheseller-lesseedoesnotsatisfytherequirementsofIndAS
115tobeaccountedforasasaleoftheasset:
a)theseller-lesseeshallcontinuetorecognisethetransferredassetandshallrecognise
afinancialliabilityasperIndAS109equaltothetransferproceeds.
b)thebuyer-lessorshallnotrecognisethetransferredassetandshallrecognisea
financialassetasperIndAS109equaltothetransferproceeds.
37
Sale and leaseback transactions
YES NO
Lease assets
Seller-lessee
Transfer assets
Buyer-lessor
Sale of the asset?
Buyer-lessor Buyer-lessorSeller-lesseeSeller-lessee
De-recognise
underlying asset
Recogniseright-
of-use asset
(proportion of
previous carrying
amount)
Recogniselease
liability
Gain / losson
saleof rights
transferred
Recognise
purchase of
asset
Apply lessor
accounting
Continue to
recognise asset
Recognise
financial
liability
Donot
recogniseasset
Recognise
financial
asset
Sale and leaseback transactions
YES NO
Lease assets
Seller-lessee
Transfer assets
Buyer-lessor
Sale of the asset?
Buyer-lessor Buyer-lessorSeller-lesseeSeller-lessee
De-recognise
underlying asset
Recogniseright-
of-use asset
(proportion of
previous carrying
amount)
Recogniselease
liability
Gain / losson
saleof rights
transferred
Recognise
purchase of
asset
Apply lessor
accounting
Continue to
recognise asset
Recognise
financial
liability
Donot
recogniseasset
Recognise
financial
asset
38
Example explaining sale and leaseback transaction
Example when transfer of the asset is a sale:
•Carrying amount of asset: Rs. 10,00,000/-
•Sale value of asset: Rs. 20,00,000/-
•Lease payment: Rs. 1,20,000/-p.a.
•Lease term: 18 years
•Discount Rate: 4.5%
•Present value of lease payments amounting Rs. 1,20,000/-p.a. for 18 years at 4.5%:
Rs. 14,59,199/-
Seller-lessee Buyer-lessor
Cash 20,00,000Asset 20,00,000
Right-to-use asset 7,29,599*Cash (20,00,000)
Asset (10,00,000)
Lease liability (14,59,199)
Gain related to Buyer-
Lessor
(2,70,400)**
*Rs. 10,00,000 (Carrying amount) ÷Rs. 20,00,000 (Sale value)×Rs. 14,59,199 (PV of lease payments)
**Rs.10,00,000 (Gain on sale of asset) ÷Rs. 20,00,000 (Sale value) ×Rs. 5,40,801(Sale value less PV of
lease payments i.e. Rs.20,00,000 –Rs.14,59,199)
Accounting in the books of:
Example explaining sale and leaseback transaction
Example when transfer of the asset is a sale:
•Carrying amount of asset: Rs. 10,00,000/-
•Sale value of asset: Rs. 20,00,000/-
•Lease payment: Rs. 1,20,000/-p.a.
•Lease term: 18 years
•Discount Rate: 4.5%
•Present value of lease payments amounting Rs. 1,20,000/-p.a. for 18 years at 4.5%:
Rs. 14,59,199/-
Seller-lessee Buyer-lessor
Cash 20,00,000Asset 20,00,000
Right-to-use asset 7,29,599*Cash (20,00,000)
Asset (10,00,000)
Lease liability (14,59,199)
Gain related to Buyer-
Lessor
(2,70,400)**
*Rs. 10,00,000 (Carrying amount) ÷Rs. 20,00,000 (Sale value)×Rs. 14,59,199 (PV of lease payments)
**Rs.10,00,000 (Gain on sale of asset) ÷Rs. 20,00,000 (Sale value) ×Rs. 5,40,801(Sale value less PV of
lease payments i.e. Rs.20,00,000 –Rs.14,59,199)
Accounting in the books of:
39
Presentation
Particulars Lessee Lessor
Presentation in Balance
Sheet
Lessee shall either present in
the balance sheet, or disclose
in the notes:
a)right-of-use assets
separately from other
assets,
b)lease liabilities separately
from other liabilities.
Right-of-use assets meeting
the definition of investment
property shall be presented as
Investment property in the
balance sheet.
Operating Lease: Lessor shall
present underlying assets in
its balance sheet according to
the nature of the underlying
asset.
Finance Lease: Lessor shall
present net investment in the
lease as receivable in the
balance sheet.
Presentation in statement of
profit and loss
Lessee shall present interest
expense on lease liability and
depreciation charge on right-
of-use asset separately in the
statement of profit and loss.
Lessor shall present lease
rental income in case of
operating lease or finance
income in case of finance
lease in the statement of
profit and loss.
Presentation
Particulars Lessee Lessor
Presentation in Balance
Sheet
Lessee shall either present in
the balance sheet, or disclose
in the notes:
a)right-of-use assets
separately from other
assets,
b)lease liabilities separately
from other liabilities.
Right-of-use assets meeting
the definition of investment
property shall be presented as
Investment property in the
balance sheet.
Operating Lease: Lessor shall
present underlying assets in
its balance sheet according to
the nature of the underlying
asset.
Finance Lease: Lessor shall
present net investment in the
lease as receivable in the
balance sheet.
Presentation in statement of
profit and loss
Lessee shall present interest
expense on lease liability and
depreciation charge on right-
of-use asset separately in the
statement of profit and loss.
Lessor shall present lease
rental income in case of
operating lease or finance
income in case of finance
lease in the statement of
profit and loss.
40
Disclosures
Lessee Lessor
Lesseeisrequiredtodiscloseamounts
forthefollowingitems:
•Depreciationchargeforright-of-use
assets.
•Interestexpensesonleaseliabilities.
•Expensesrelatingtoshortterm/low
valueassetsaccountedonstraightline
orothersystematicbasisoverlease
term.
•Additions/deductionsandcarrying
valueofright-of-useassets.
•Gain/lossarisingfromsaleandlease
backtransactions.
•Maturityanalysisofleaseliabilities.
Operatinglease:Lessorisrequiredto
discloseamountsforthefollowingitems:
•Leaseincome
•Variableleasepaymentsthatdonot
dependonanindexorarate
•Maturityanalysisofthelease
paymentsreceivable
Financelease:Lessorisrequiredto
discloseamountsforthefollowingitems:
•Sellingprofitorloss
•Financeincomeonnetinvestmentin
thelease
•Maturityanalysisofthelease
paymentsreceivable
Disclosures
Lessee Lessor
Lesseeisrequiredtodiscloseamounts
forthefollowingitems:
•Depreciationchargeforright-of-use
assets.
•Interestexpensesonleaseliabilities.
•Expensesrelatingtoshortterm/low
valueassetsaccountedonstraightline
orothersystematicbasisoverlease
term.
•Additions/deductionsandcarrying
valueofright-of-useassets.
•Gain/lossarisingfromsaleandlease
backtransactions.
•Maturityanalysisofleaseliabilities.
Operatinglease:Lessorisrequiredto
discloseamountsforthefollowingitems:
•Leaseincome
•Variableleasepaymentsthatdonot
dependonanindexorarate
•Maturityanalysisofthelease
paymentsreceivable
Financelease:Lessorisrequiredto
discloseamountsforthefollowingitems:
•Sellingprofitorloss
•Financeincomeonnetinvestmentin
thelease
•Maturityanalysisofthelease
paymentsreceivable
41
Summary
IndAS116isapplicablefrom1
st
April,2019.
IndAS116appliesacontrolmodelfortheidentificationofleases,distinguishingbetween
leasesandservicecontractsonthebasisofwhetherthereisanidentifiedassetcontrolled
bythelessee.
Lesseehastorecognisearight-to-useassetandaleaseliabilityforallleasecontracts
exceptforshort-termleasesandleasesoflowvalueassets.Asaresultofthischange,
lesseehastorecognisealmostallleasesonbalancesheetascomparedtooff-balance
sheetunderpreviousrequirementsspecifiedinIndAS17.
Lessoraccountingmodelstayssubstantiallythesameundercurrentguidance.
Forlessor,leasesareclassifiedintooperatingorfinanceleasebutforlesseethereisno
suchclassificationfromnowonwards.
Enhanceddisclosurerequirement.
InordertominimizetheimpactofapplyingIndAS116,lesseesmayenterintoleaseswith
shorttermorleasewithvariablepaymentnotlinkedtoanyrateorindex.
Summary
IndAS116isapplicablefrom1
st
April,2019.
IndAS116appliesacontrolmodelfortheidentificationofleases,distinguishingbetween
leasesandservicecontractsonthebasisofwhetherthereisanidentifiedassetcontrolled
bythelessee.
Lesseehastorecognisearight-to-useassetandaleaseliabilityforallleasecontracts
exceptforshort-termleasesandleasesoflowvalueassets.Asaresultofthischange,
lesseehastorecognisealmostallleasesonbalancesheetascomparedtooff-balance
sheetunderpreviousrequirementsspecifiedinIndAS17.
Lessoraccountingmodelstayssubstantiallythesameundercurrentguidance.
Forlessor,leasesareclassifiedintooperatingorfinanceleasebutforlesseethereisno
suchclassificationfromnowonwards.
Enhanceddisclosurerequirement.
InordertominimizetheimpactofapplyingIndAS116,lesseesmayenterintoleaseswith
shorttermorleasewithvariablepaymentnotlinkedtoanyrateorindex.
Comparison
There is no major difference between Ind AS and IFRS.
If you have any question then write it on my mail id.
42
There is no major difference between Ind AS and IFRS.
If you have any question then write it on my mail id.
42
43
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