Technical note: The entries below illustrate common lessee-side fact patterns. Account names, tax treatment and presentation should be adapted to the entity's contracts, policies and applicable law.
Ind AS 116 replaces a simple rent-expense mindset with a right-of-use asset and lease liability model for most lessee arrangements. The calculations are important, but period-end errors often arise when the approved lease schedule does not flow cleanly into the ledger.
This practical roundup presents 12 entries that finance teams commonly need across the lease lifecycle. The numbers are illustrative and rounded.
Running example
Assume that an entity enters into a three-year property lease on 1 April:
- Annual payment: ₹12,00,000, payable at each year-end
- Incremental borrowing rate: 10%
- Initial direct costs: ₹50,000
- Lease incentive receivable from the lessor: ₹1,00,000
- No purchase option or restoration obligation in the base case
The present value of the three annual payments is approximately ₹29,84,222. The opening right-of-use (ROU) asset is therefore approximately ₹29,34,222: lease liability plus initial direct costs less the lease incentive.
1. Recognise the lease liability at commencement
The lease liability begins with the present value of lease payments not paid at commencement.
Right-of-use asset Dr ₹29,84,222
To lease liability ₹29,84,222This first entry establishes the core Ind AS 116 balance-sheet relationship. The liability should reconcile to the approved payment schedule, discount rate and commencement date.
2. Capitalise qualifying initial direct costs
Incremental costs that would not have been incurred without obtaining the lease are included in the ROU asset.
Right-of-use asset Dr ₹50,000
To bank / payable ₹50,000General legal, payroll or administrative expenditure is not automatically an initial direct cost. The contract-level support should explain why the cost qualifies.
3. Record a lease incentive
Lease incentives reduce the cost of the ROU asset. Where the incentive is receivable at commencement:
Lease incentive receivable Dr ₹1,00,000
To right-of-use asset ₹1,00,000When cash is received, debit bank and credit the receivable. The precise entry can vary with the timing and form of the incentive, but the economics should not be hidden inside rental expense.
4. Accrue interest on the lease liability
For year one, the illustrative finance cost is 10% of the opening liability:
Finance cost Dr ₹2,98,422
To lease liability ₹2,98,422Interest should produce a constant periodic rate on the remaining liability. A common control failure is using a straight-line interest charge instead of the effective interest method.
5. Record the lease payment
At the end of year one:
Lease liability Dr ₹12,00,000
To bank ₹12,00,000The payment contains both finance cost and principal economically, but the ledger flow may be recorded through separate interest accrual and cash-payment entries. After the payment, the illustrative closing liability is ₹20,82,644.
6. Depreciate the ROU asset
If the asset is depreciated over the three-year lease term, the annual charge on the ₹29,34,222 opening ROU asset is approximately ₹9,78,074:
Depreciation—ROU asset Dr ₹9,78,074
To accumulated depreciation—ROU asset ₹9,78,074The depreciation period changes where ownership transfers or the lessee is reasonably certain to exercise a purchase option. The useful-life conclusion should therefore be tied to the contract assessment.
7. Recognise a restoration provision
Suppose the present value of a contractual restoration obligation at commencement is ₹2,00,000:
Right-of-use asset Dr ₹2,00,000
To restoration provision ₹2,00,000The provision subsequently unwinds under the applicable provision requirements:
Finance cost Dr ₹X
To restoration provision ₹XRestoration obligations are easily missed when contract abstraction focuses only on rental payments.
8. Remeasure for an index- or rate-linked payment change
Assume a qualifying reassessment increases the measured lease liability by ₹1,50,000 and the ROU asset still has sufficient carrying value:
Right-of-use asset Dr ₹1,50,000
To lease liability ₹1,50,000The team should preserve the trigger date, revised cash flows and required discount-rate conclusion. Not every change in cash paid produces the same accounting response.
9. Account for a modification that is not a separate lease
If a modification increases the liability by ₹3,00,000 and does not qualify as a separate lease:
Right-of-use asset Dr ₹3,00,000
To lease liability ₹3,00,000Where scope decreases, the accounting is more complex because the lessee reduces the carrying amounts of both the ROU asset and liability and recognises the resulting gain or loss.
10. Record a partial termination
Suppose a floor of leased office space is surrendered. The related liability reduction is ₹5,00,000 and the proportionate ROU asset reduction is ₹4,40,000:
Lease liability Dr ₹5,00,000
To right-of-use asset ₹4,40,000
To gain on lease modification ₹60,000The proportionate reduction should be supported by a defensible measure of the terminated right of use. A residual balancing figure without a scope analysis is difficult to review.
11. Recognise impairment of the ROU asset
If impairment testing identifies a ₹2,50,000 loss:
Impairment loss Dr ₹2,50,000
To accumulated impairment—ROU asset ₹2,50,000Lease accounting does not remove the need to consider impairment indicators. Closed locations, underused premises or adverse business changes can require separate attention.
12. Close the lease at expiry
After the final payment and depreciation charge, both the lease liability and ROU asset should be nil, subject to rounding and any end-of-term adjustments. The asset ledger may be cleared as follows:
Accumulated depreciation—ROU asset Dr ₹X
Accumulated impairment—ROU asset Dr ₹Y
To right-of-use asset ₹X + ₹YAny small liability balance should be investigated against the schedule rather than written off automatically. It may signal incorrect payment timing, a missed modification or rounding applied too early.
Period-end review checklist
Before posting, confirm that:
- the contract population reconciles to procurement, legal and payment records;
- commencement dates, terms, options and payment frequencies are supported;
- discount rates match approved methodology and currency/tenor characteristics;
- the ROU roll-forward agrees to additions, depreciation, modification and impairment;
- the liability roll-forward agrees to additions, interest, cash payments and remeasurement;
- posted journals agree to the final approved schedule; and
- disclosures use the same controlled data set as the ledger entries.
Frequently asked questions
Is lease rental expense eliminated under Ind AS 116?
For most lessee leases, the single operating lease expense is replaced by depreciation of the ROU asset and finance cost on the liability. Exempt short-term and low-value leases may continue to produce an expense pattern subject to the standard and the entity's elections.
Is the security deposit part of the lease liability?
Not automatically. A refundable deposit may be a separate financial asset measured under the applicable financial-instrument requirements. Any off-market element may affect the related lease accounting, so it should be assessed rather than combined mechanically with lease payments.
Should GST be included in the lease liability?
The answer depends on the nature and recoverability of the tax and the contractual payment definition. This should be addressed in the entity's accounting policy with tax input rather than assumed from the invoice format.
Take the next step
Managing modifications, discount rates, schedules and journal postings across many contracts is difficult in disconnected spreadsheets. Explore RVSBELL Analytics' Lease Accounting Services or talk to an expert about a controlled contract-to-ledger workflow.
Technical reference
- Ministry of Corporate Affairs, Companies (Indian Accounting Standards) Amendment Rules, 2019—Ind AS 116