indas116-leases-191005092644 (1).pdf

IND AS 116

1. IND AS -116
Prepared By:
Garima Maheshwari

2. IND AS 116 Overview
Effectivedate–1
st
April2019
Eliminatestheaccountingdifferencebetweenanoperatingleaseand
anfinanceleaseforlessee
Lessee’swithoperatingleaseswillhaveamajorimpactinaccounting
Forlessortheaccountingandclassificationisdonebasedonexisting
operating/financeleasemodel

3. Pre-requisites of Lease
Identified asset
Lessee obtains substantially all of the economic benefits
Lessee directs the use
If all the above conditions are fulfilled the Contract will classify as
lease.

4. Finance Lease vs. Operating Lease
Finance lease is a lease under which the risks and rewards of ownership are
transferred to lessee.
Operating lease is any lease other than a finance lease.

5. Is lease
more
than 12
months
Short term Lease
Other than short term lease
Adherence to the Standard is
optional; the transaction may
be expensed as a revenue item
Other than low value assets Low value assets
Recognition of the right to use and lease
liability is compulsory.
IndAS –116
No
Yes

6. Short term Leases
Short-term leases upto12 months “lease tenure” are excluded from
the Standard
Lease tenure includes the right to renew, if it is reasonably certain
that the right will be exercised

7. Lessor accounting
FinanceLease
Recognitionoftheasset–Receivableatanamountequaltothe
netinvestmentinthelease.
RecognitionoftheIncome–Financeincomeovertheleaseterm,
basedonapatternreflectingaconstantperiodicrateofreturnon
thelessor’snetinvestmentinthelease.
OperatingLease
Recognitionoftheasset–capitalised.
RecognitionoftheIncome–Eitherstraight-linebasisoranother
systematicbasiswhichismorerepresentativeofthepatterninwhich
benefitfromtheuseoftheunderlyingassetisdiminished.

8. Lessee accounting
InitialRecognition
Recogniseassetsandliabilitiesforallleasesforatermofmore
than12months,unlesstheunderlyingassetisoflowvalue.
recognisearightofuseassetrepresentingitsrighttousethe
underlyingleasedassetandaleaseliabilityrepresentingits
obligationstomakeleasepayments.
Measureright-of-useassetssimilarlytoothernonfinancialassets
(suchasproperty,plantandequipment)andleaseliabilities
similarlytootherfinancialliabilities.
Recognisedepreciationoftheright-of-useassetandintereston
theleaseliability(asperINDAS17thesamewasclassifiedasrent
incaseofoperatingleaseonastraight-linebasis).
Recogniseinterestcostasfinancecost.

9. Lessee accounting
InitialRecognition
Leaseliability=Presentvalueofleaserentals+presentvalueof
expectedpaymentsattheendoflease.Theleaseliabilitywillbe
amortisedusingtheeffectiveinterestratemethod.
Leaseterm=Non-cancellableperiod+renewableperiodiflessee
reasonablycertaintoexercise.
Righttouseasset=Leaseliability+leasepayments(advance)-lease
incentivestobereceivedifanyinitial+initialdirectcosts+costof
dismantling/restoringetc.
TheassetwillbedepreciatedasperINDAS16Propertyplantand
equipment.

10. CASE STUDY –In books of lessee
RentofRs.10lakhsperannum.
Discountrate–10%.
Leasetenure–5years.
Treatmentinbooksoflessee–
RightofuseassetwillberecognisedatRs.37,90,986(Present
valueof5instalmentsofRs.10lakhseach)andwillbe
depreciatedoveraperiodof5years.

11. Lease liability
Year Opening Interest Payment Closing
1 37,90,787 3,79,079 10,00,000 31,69,865
2 31,69,865 3,16,987 10,00,000 24,86,852
3 24,86,852 2,48,685 10,00,000 17,35,537
4 17,35,537 1,73,554 10,00,000 9,09,091
5 9,09,091 90,909 10,00,000 -0

12. P&L impact
0.76 0.76 0.76 0.76 0.76
0.38
0.32
0.25
0.17
0.09
1.00 1.00 1.00 1.00 1.00
-
0.20
0.40
0.60
0.80
1.00
1.20
FY1 FY2 FY3 FY4 FY5
Depreciation Interest Cash Rental
Rs. In lakhs

13. Snapshot of IndAS 116
Lease
Accounting
Lessor
Finance Lease
Treat as
receivable
Operating
Lease
Treat as FA and
depreciation to be
charged
Lessee
Short tenure ( up to
12 months)
At the option of he
lessee, lease rental can
be charged to P&L
Long term
Recognised as right
of use Asset
If transfers ownership or certainty of exercise of
purchase option –depreciation charged over the
useful life of the asset
If no transfer of ownership, asset to be depreciated
from lease commencement date till earlier of –end
of useful life or end of lease term
Obligation to pay lease
rental on liability side

14. Impact
Balance Sheet
Companies with operating leases will appear to be more asset-rich, but
also more heavily indebted.
Statement of Profit & Loss
Total lease expense will be front-loaded even when cash rentals are
constant.
Favorable impactexpected
►EBITDA
►Totalassets
Adverse impactexpected
►Netassets
►Interest coverageratios

15. AS 19/IndAS 17/IndAS 116
N
o
Particular AS-19 IND-AS 17 IND AS 116
1Scope & coverage
Excludes lease agreement to
use land.
Land is covered. Land is covered.
2
Sale & Leaseback
Transactions of
Finance Lease
Profit/Loss must be deferred
and amortized over the lease
termin proportion to the
depreciation of the leased
asset
Gains/loss should be deferred
and amortized over the lease
term.The ratio is not defined.
It states that the gains/loss
should be deferred and
amortized over the lease
term.The ratio is not defined.
3
Operating Lease
rentals and inflation
The standardis silent on its
treatment
straight line method should
not be used when the rentals
are increased based on
inflations
The standardis silent of its
treatment
4
Treatment of Initial
Direct Cost –
Operating Leases
Lessor has an option to either
defer the booking of cost and
allocate to income over the
lease term in proportion to the
recognition of rent income, or
are recognised as an
expense in the statement of
profit and loss in the period in
shall be added to the carrying
amount of the leased asset
and recognised as an
expense over the lease term
on the same basis as the
lease income.
Same as IND-AS 17.

16. AS 19/IndAS 17/IndAS 116
NoParticular AS-19 IND-AS 17 IND AS 116
5
Treatment of Initial
Direct Cost –
Finance Leases
Recognized immediately in
thestatement of profit and
lossorallocated against the
finance income over the lease
term.
Included in the initial
measurement of the finance
lease receivable and reduced
in the amount of income
recognised over the lease
term..
Included in the initial
measurement of the net
investment in the lease and
reduce the amount of income
recognised over the lease
term.
6Lease Incentives
No specific discussion of
lease incentives.
The lessor and lessee shall
recognise the aggregate cost
of incentives as a reduction of
rental income over the lease
term.
The incentives are recorded
as deduction from rentals.
7
Classification of
Lease in hands of
lessee
Leases were recorded as per
their classification into
Operating and Finance Lease
Leases were recorded as per
their classification into
Operating and Finance Lease
Lessee will follow Single
Lease Accounting. There is
no classification as operating
or finance Lease for lessee.

17. AS 19/IndAS 17/IndAS 116
NoParticular AS-19 IND-AS 17 IND AS 116
8
Accounting and
Presentation in
financial Statement
by lessee by
lessee
Under Operating lease, asset
was not recorded in books
and recognized lease
payments as expense in the
profit and loss account.
Under Operating lease,
assets was not recorded in
books and recognized lease
payments as expense in the
profit and loss account
Lessee will recognize assets
and liabilities for all leases
with a term of more than 12
months, unless the
underlying asset is of low
value.
Lessee would recognize
depreciation expense on the
right of use asset and interest
expense on the lease liability,
classify the lease payments
into principal and interest
component.

18. AS 19/IndAS 17/IndAS 116
NoParticular AS-19 IND-AS 17 IND AS 116
9
Disclosures
Requirements of
lessor
Exemption granted to small
and medium sized
companies for certain
disclosures.
Exemption removed.
Additional Requirements of
disclosure for lessor such as
disclosure of maturity
analysis of lease payments;
quantitative and qualitative
explanation of significant
changes in carrying amount
of new investment in finance
lease.
10
Disclosures
Requirements of
lessee
NA NA
Additional requirements as
disclosure of maturity
analysis of lease payments;
quantitative and qualitative
explanation of significant
changes in carrying amount
of new investment in finance
leases.