Lease Accounting as per Ind AS 116

Summary of the key provisions of Ind AS 116

  • Ind AS 116 covers Lease Accounting, and this has replaced the earlier accounting standard Ind AS 17
  • A lease is an agreement by which the owner known as ‘lessor’, of a specific asset allows another person known as the ‘lessee’ to use the asset for a specified period in exchange for certain periodic payments known as ‘lease rentals’ to the lessor.
  • A finance lease is like buying an asset with the finance provided by an external party. It allows a lessee to own an asset with the help of finance from the lessor. The lessee has the option to be the permanent owner of the asset at the end of the lease term, subject to certain terms.
  • An operating lease is like an asset rental. It allows the lessee to use the leased asset for a specific period of time. The specified period of time usually less compared to the useful life of the asset.
  • IFRS 16 requires an entity to determine whether a contract is a lease or contains a lease at the inception of the contract. The assessment of whether a contract is a lease or contains a lease would be simple in most of the cases. However, for certain other contracts we may have to apply our mind to decide if it is a lease contract or no.
  • Where a contract includes significant services, it may be challenging to determine whether the contract conveys the right to direct the use of an identified asset.
  • Lease liability is initially recognised based on the present value of minimum lease payments during the lease term
  • Right-of-use asset is recognised at cost, based on the initial measurement of lease liability plus any lease payments made to the lessor at or before the commencement date as reduced by any lease incentives received, initial estimate of the restoration costs and any initial direct costs incurred by the lessee.
  • The lease liability is measured in subsequent periods using the interest rate implicit in the lease if that rate can be readily determined.
  • If interest rate implicit in the lease cannot be readily determined, then the lessee’s incremental borrowing cost is considered.
  • The right-of-use asset is depreciated as per the requirements in Ind AS 16, Property, Plant and equipment & Ind AS – Standard for Intangible Assets.
  • Recognition exemptions are provided for low-value assets and short- term leases. Assets of low value include IT equipment or office furniture. However, there is no monetary threshold has been defined for low-value assets. Short-term leases are defined as leases with a lease term of 12 months or less.
  • If an entity chooses to apply any one of the exemptions, payments are recognised on a straight-line basis or another systematic basis that is more representative of the pattern of the lessee’s benefit.
  • The effective date of Ind AS 116 is 1st April 2019

Lease accounting, lease period extended after year 1 – Journal entries

Lease accounting, lease period extended after year 1 – Journal entries Details for lease accounting for lease extension Let us assume the following details for lease accounting: Lease start date: 1-Apr-2019 Lease end date: 31-Mar-2024 Lease payments: Rs. 2,75,000 Payment frequency: Annual – payable at the end Incremental borrowing rate: 9% Lease extension on 1-4-2020: Lease Modification effective date: 1-Apr-2020 Lease end date extended up to: 31-Mar-2026 All other terms remain the same When the lease is modified without any increase in the scope of the lease then lease liability and the right-of-use are recomputed on the effective date of such modification. This would result in amortising an additional amount and the …
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Lease accounting, interest-free deposit lease period extended after year 1

Lease accounting, interest-free deposit lease period extended after year 1 Details for lease accounting for lease extension Let us assume the following details for lease accounting: Lease start date: 1-Apr-2019 Lease end date: 31-Mar-2024 Lease payments: Rs. 2,75,000 Lease Deposit: Rs. 3,00,000 Payment frequency: Annual – payable at the end Incremental borrowing rate: 9% Lease extension on 1-4-2020: Lease Modification effective date: 1-Apr-2020 Lease end date extended up to: 31-Mar-2026 All other terms remain the same When the lease is modified without any increase in the scope of the lease then lease liability and the right-of-use are recomputed on the effective date of such modification. This would result in amortising an additional …
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Lease accounting Journal Entries for Modification

Lease accounting Journal entries for Modification Details for lease accounting with modification Let us assume the following details for lease accounting: Lease start date: 1-Apr-2019 Lease end date: 31-Mar-2024 Lease payments: Rs. 2,75,000 Lease Deposit: Rs. 3,00,000 Payment frequency: Annual – payable at the end Incremental borrowing rate: 9% Lease modification: Lease Modification effective date: 1-Apr-2020 Lease payments: Rs. 3,25,000 When the lease is modified without any increase in the scope of the lease then lease liability and the right-of-use are recomputed on the effective date of such modification. This would result in amortising an additional amount and the finance charges based on the revised lease liability should be recomputed. Right-of-use Recognition …
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Lease accounting with an interest-free deposit

Lease accounting with an interest-free deposit Details for lease accounting Let us assume the following details for lease accounting: Lease start date: 1-Apr-2019 Lease end date: 31-Mar-2024 Lease payments: Rs. 2,75,000 Lease Deposit: Rs. 3,00,000 Payment frequency: Annual – payable at the end Incremental borrowing rate: 9% Right-of-use Recognition of Lease liability Amortisation of Right-of-use Finance cost Interest free deposit Imputed interest income Amortisation of Right-of-use Trial balance Profit and Loss Account Balance Sheet
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Journal entries for lease accounting

Journal entries for lease accounting Details for lease accounting Let us assume the following details for lease accounting: Lease start date: 1-Apr-2019 Lease end date: 31-Mar-2024 Lease payments: Rs. 2,75,000 Payment frequency: Annual – payable at the end Incremental borrowing rate: 9%   Right-of-use   Recognition of Lease liability Amortisation of Right-of-use Finance cost Trial balance Profit & Loss Account Balance Sheet
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Steps in lease accounting

Steps in lease accounting Details for lease accounting Let us assume the following details for lease accounting as per Ind AS 116 Lease start date: 1-Apr-2019 Lease end date: 31-Mar-2024 Lease payments: Rs. 2,75,000 Payment frequency: Annual – payable at the end Incremental borrowing rate: 9% Step 1: Calculate the right-of-use The right-of-use is first calculated as follows: Step 2: Prepare amortisation schedule The amortisation schedule based on straight line method is calculated as follows: Step 3: Calculate Lease Liability The lease liability is computed as follows: Step 4: Calculate the finance charges The finance charges for the lease liability is calculated as follows:
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Operating lease vs financing lease

Operating lease vs financing lease Classification of Lease Leases are classified as either finance lease or operating lease. A finance lease is like buying an asset with the finance provided by an external party. It allows a lessee to own an asset with the help of finance from the lessor. The lessee has the option to be the permanent owner of the asset at the end of the lease term, subject to certain terms.An operating lease is like an asset rental. It allows the lessee to use the leased asset for a specific period of time. The specified period of time usually …
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Lease Accounting as per IFRS 16 vs. AS 19

Lease Accounting as per IFRS 16 vs. AS 19 Sl. No.TopicInd AS 116AS 191Applicability to land & buildingSpecific provisions dealing with leases of land and building exists in Ind AS 116Not applicable to lease of lands2Residual ValueNo definition of “Residual Value”The term “Residual Value” is defined3Inception & commencement of leaseInception of lease and commencement of lease are different as per Ind AS 116Both the terms are used at some places in AS 19, and these terms are not defined and distinguished4Recognition dateLease recognised as finance leases as assets and liabilities in balance sheet at the commencement of the lease termRecognition …
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Lease modifications

Lease modifications What is meant by lease modification? A lease modification is a change in the scope of a lease, or the consideration for a lease, that was not part of its original terms and conditions. Examples of lease modifications are as follows: increasing the scope of the lease by adding the right to use additional underlying assetsdecreasing the scope of the lease by removing the right to use of some underlying assetsincreasing the scope of the lease by extending the contractual lease termchanging the consideration in the lease by increasing or decreasing the lease payments Changes that result from renegotiations and changes …
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Presentation & Disclosure – lease accounting standard

Presentation & Disclosure – lease accounting standard Presentation A lessee should either present in the balance sheet, or disclose in the notes: right-of-use assets separately from other assets. If a lessee does not present right-of-use assets separately in the balance sheet, the lessee should:include right-of-use assets within the same line item as that within which the corresponding underlying assets would be presented if they were owned; anddisclose which line items in the balance sheet include those right-of-use assets.lease liabilities separately from other liabilities. If a lessee does not present lease liabilities separately in the balance sheet, the lessee should disclose which line …
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