Indian Accounting Standard (Ind AS) 116 Summary
Ind AS 116, Leases requires an entity to assess at the inception of the contract, whether the contract is, or contains, a lease.
A contract is, or contains, a lease if it conveys the right to control the use of an identified asset (explicitly or implicitly specified in the contract) for a period of time in exchange for a consideration.
The standard lays emphasis on which party controls the use of the identified asset. A customer has the right to control the use of an identified asset, if it has the:
– Right to obtain substantially all of the economic benefits from use of the identified asset and
– Right to direct the use of the identified asset i.e. it has the right to direct how and for what purpose the asset is used throughout the period of use.
Once a lease is identified, a lessee is required to recognise a Right-Of-Use (ROU) asset representing its right to use the underlying leased asset and a lease liability representing its obligation to make lease payments on the balance sheet.
ROU asset will be measured at cost and the lease liability will be measured at the present value of the lease payments that are not paid at that date.
The cost of the ROU asset will include following amounts:
– Initial measurement of lease liability
– Prepaid lease payments less any lease incentives received
– Initial direct costs incurred by the lessee and
– Estimated costs to dismantle, remove or restore the underlying asset.
The lease payments to be included in the measurement of lease liability comprise the following payments:
– Fixed payments (including in-substance fixed payments)
– Variable lease payments that depend on an index or a rate
– Amounts expected to be payable by the lessee under residual value guarantees
– The exercise price of a purchase option if the lessee is reasonably certain to exercise that option
– Payments of penalties for terminating the lease, if the lease term reflects the lessee exercising an option to terminate the lease.
For calculating the amount of lease liability, the lease payments will be discounted using the interest rate implicit in the lease, if that rate can be readily determined. If that rate cannot be readily determined, the lessee is required to use its incremental borrowing rate.
While determining the lease term, termination options held by the lessor only are not considered. Termination options held by the lessee will also be considered.
Subsequently, the lease liability is measured at amortised cost using the effective interest method. A ROU asset will be measured at cost less accumulated depreciation and accumulated impairment.
A lessee is required to remeasure the lease liability by discounting the revised lease payments based on either unchanged discount rate or a revised rate depending upon the facts and circumstances of a case.
A lessee may elect not to apply the lease accounting model to:
– Leases with a lease term of 12 months or less that do not contain a purchase option i.e. short term leases.
– Leases for which the underlying asset is of low value when it is new – even if the effect is material in aggregate.
If a lessee sub-leases an asset, or expects to sub-lease an asset, the head lease does not qualify as a lease of a low-value asset.
A lessor will classify each of its leases as an operating lease or a finance lease. A lease is classified as a finance lease if it transfers substantially all the risks and rewards incidental to the ownership of an underlying asset. A lease is classified as an operating lease if it does not transfers substantially all the risks and rewards incidental to the ownership of an underlying asset. The lease classification test is based on Ind AS 17, Leases classification criteria.
A change in the scope of a lease, or the consideration for a lease, that was not part of the original terms and conditions of the lease will be accounted for as a lease modification by a lessor and a lessee.
In a sale-and-leaseback transaction, an entity is required to apply the requirements for determining when a performance obligation is satisfied in Ind AS 115 to determine whether the transfer of an asset is accounted for as a sale of that asset.