Objective & Scope of lease accounting standard
Objective
- Sets out the principles for recognition, measurement, presentation and disclosure of leases
- Objective is to ensure that lessees and lessors provide relevant information that faithfully represents those transactions
- Enables users to assess the effect that leases have on the financial position, financial performance and cash flows of an entity
- Consistently applied to contracts with similar characteristics and in similar circumstances
Scope
Ind AS 116 is applied to all leases, including leases of right-of-use assets in a sublease.
Out of scope:
- leases to explore for or use minerals, oil, natural gas and similar non-regenerative resources;
- leases of biological assets within the scope of Ind AS 41, Agriculture
- service concession arrangements as per Ind AS 115, Revenue from Contracts with Customer;
- licences of intellectual property granted by a lessor within the scope of Ind AS 115, Revenue from Contracts with Customers
- rights held by a lessee under licensing agreements within the scope of Ind AS 38, Intangible Assets, for such items as motion picture films, video recordings, plays, manuscripts, patents and copyrights.
Ind AS 116 may be applied for in respect of leases of intangible assets but not required to do so.
Portfolio application
Ind AS 116 requires the accounting for an individual lease
- Applied to a portfolio of leases with similar characteristics if the effects on the financial statements would not differ materially from applying Ind AS 116 to the individual leases within that portfolio
- If accounting for a portfolio, should use estimates and assumptions commensurate with the size and composition of the portfolio
Combination of contracts
Combine two or more contracts entered into at/near the same time with the same counterparty or related parties of the counterparty
Accounted for the contracts as a single contract if one or more of the following criteria are met:
- the contracts are negotiated as a package with an overall commercial objective that cannot be understood without considering the contracts together
- the amount of consideration to be paid in one contract depends on the price or performance of the other contract
- the rights to use underlying assets conveyed in the contracts form a single lease component
Statement on Auditing Standards-SA 265
What is the difference between operating lease and finance lease?
Ind AS Accounting Standards
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…
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 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. 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…
Lease accounting Journal Entries for Modification
Lease accounting Journal entries for Modification Details for lease accounting with modification 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. 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…
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 Lease Accounting Software Pricing
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
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…
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…