2. IND AS 116 Overview
Effective date – 1st April 2019
Eliminates the accounting difference between an operating lease and
an finance lease for lessee
Lessee’s with operating leases will have a major impact in accounting
For lessor the accounting and classification is done based on existing
operating/finance lease model
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.
Ind AS – 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
Finance Lease
Recognition of the asset – Receivable at an amount equal to the
net investment in the lease.
Recognition of the Income – Finance income over the lease term,
based on a pattern reflecting a constant periodic rate of return on
the lessor’s net investment in the lease.
Operating Lease
Recognition of the asset – capitalised.
Recognition of the Income – Either straight-line basis or another
systematic basis which is more representative of the pattern in which
benefit from the use of the underlying asset is diminished.
8. Lessee accounting
Initial Recognition
Recognise assets and liabilities for all leases for a term of more
than 12 months, unless the underlying asset is of low value.
recognise a right of use asset representing its right to use the
underlying leased asset and a lease liability representing its
obligations to make lease payments.
Measure right-of-use assets similarly to other nonfinancial assets
(such as property, plant and equipment) and lease liabilities
similarly to other financial liabilities.
Recognise depreciation of the right-of-use asset and interest on
the lease liability (as per IND AS 17 the same was classified as rent
in case of operating lease on a straight-line basis).
Recognise interest cost as finance cost.
9. Lessee accounting
Initial Recognition
Lease liability = Present value of lease rentals + present value of
expected payments at the end of lease. The lease liability will be
amortised using the effective interest rate method.
Lease term = Non-cancellable period + renewable period if lessee
reasonably certain to exercise.
Right to use asset = Lease liability + lease payments (advance)- lease
incentives to be received if any initial + initial direct costs + cost of
dismantling/ restoring etc.
The asset will be depreciated as per IND AS 16 Property plant and
equipment.
10. CASE STUDY – In books of lessee
Rent of Rs. 10 lakhs per annum.
Discount rate – 10%.
Lease tenure – 5 years.
Treatment in books of lessee –
Right of use asset will be recognised at Rs. 37,90,986 (Present
value of 5 instalments of Rs. 10 lakhs each) and will be
depreciated over a period of 5 years.
13. Snapshot of Ind AS 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 impact expected
► EBITDA
► Total assets
Adverse impact expected
► Net assets
► Interest coverage ratios
15. AS 19/Ind AS 17/Ind AS 116
N
o
Particular AS-19 IND-AS 17 IND AS 116
1 Scope & 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
term in 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 standard is silent on its
treatment
straight line method should
not be used when the rentals
are increased based on
inflations
The standard is 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
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/Ind AS 17/Ind AS 116
No Particular AS-19 IND-AS 17 IND AS 116
5
Treatment of Initial
Direct Cost –
Finance Leases
Recognized immediately in
the statement of profit and
loss or allocated 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.
6 Lease 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/Ind AS 17/Ind AS 116
No Particular 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/Ind AS 17/Ind AS 116
No Particular 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.
