Indian Accounting Standard 116, Leases
This Standard sets out the principles for the recognition, measurement, presentation and disclosure of leases. The objective is to ensure that lessees and lessors provide relevant information in a manner that faithfully represents those transactions. This information gives a basis for users of financial statements to assess the effect that leases have on the financial position, financial performance and cash flows of an entity.
The standard applies to all leases, including leases of right-of-use assets in a sublease, except for:
(a) Leases to explore for or use minerals, oil, natural gas and similar non-regenerative resources;
(b) Leases of biological assets within the scope of Ind AS 41, Agriculture, held by a lessee;
(c) Service concession arrangements within the scope of Appendix D, Service Concession Arrangements of Ind AS 115, Revenue from Contracts with Customer;
(d) Licences of intellectual property granted by a lessor within the scope of Ind AS 115, Revenue from Contracts with Customers; and
(e) 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.
A lessee may, but is not required to, apply Ind AS 116 to leases of intangible assets other than those described in point (e) above.
This Standard specifies the accounting for an individual lease. However, as a practical expedient, an entity may apply this Standard to a portfolio of leases with similar characteristics if the entity reasonably expects that the effects of accounting on portfolio basis on the financial statements would not differ materially from applying this Standard to individual leases.
In addition to the above scope exclusions, a lessee can elect not to apply the recognition, measurement and presentation requirements of Ind AS 116 to short-term leases; and low value leases.
If a lessee elects for the exemption, then it shall recognise the lease payments associated with those leases as an expense on either a straight-line basis over the lease term or another systematic basis if that basis is more representative of the pattern of the lessee’s benefit.
The election for short-term leases shall be made by class of underlying asset to which the right of use relates. The low value lease exemption can be made on a lease-by-lease basis.
A Lessee shall assess the value of an underlying asset based on the valued of the asset when it is new. The assessment of whether an underlying asset is of low value is performed on an absolute basis. Leases of low-value assets qualify for exemption regardless of whether those leases are material to the lessee. The assessment is not affected by the size, nature or circumstances of the lessee. Accordingly, different lessees are expected to reach the same conclusions about whether a particular underlying asset is of low value. Examples of low-value underlying assets can include tablet and personal computers, small items of office furniture and telephones.
If a lessee subleases an asset, or expects to sublease an asset, the head lease does not qualify as a lease of a low-value asset.
If an entity applies either exemption, it must disclose that fact and certain additional information to make the effect of the exemption known to users of its financial statements.
Lease is a contract, or part of a contract, that conveys the right to use an asset (the underlying asset) for a period of time in exchange for consideration.
Right-of-use asset is an asset that represents a lessee’s right to use an underlying asset for the lease term.
Lease term is the non-cancellable period for which a lessee has the right to use an underlying asset, together with both:
(a) periods covered by an option to extend the lease if the lessee is reasonably certain to exercise that option; and
(b) periods covered by an option to terminate the lease if the lessee is reasonably certain not to exercise that option.
Short-term lease is a lease that, at the commencement date, has a lease term of 12 months or less. A lease that contains a purchase option is not a short-term lease.
Lease incentives are payments made by a lessor to a lessee associated with a lease, or the reimbursement or assumption by a lessor of costs of a lessee.
Lease payments are payments made by a lessee to a lessor relating to the right to use an underlying asset during the lease term, comprising the following:
(a) fixed payments (including in-substance fixed payments), less any lease incentives;
(b) variable lease payments that depend on an index or a rate;
(c) the exercise price of a purchase option if the lessee is reasonably certain to exercise that option; and
(d) payments of penalties for terminating the lease, if the lease term reflects the lessee exercising an option to terminate the lease.
Finance lease is a lease that transfers substantially all the risks and rewards incidental to ownership of an underlying asset.
Operating lease is a lease that does not transfer substantially all the risks and rewards incidental to ownership of an underlying asset.
Identifying a lease
At inception of a contract, an entity shall assess whether the contract is, or contains, a lease. A contract is, or contains, a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration.
For a contract that is, or contains, a lease, an entity shall account for each lease component within the contract as a lease separately from non-lease components of the contract, unless the entity applies the practical expedient wherein, a lessee may elect, by class of underlying asset, not to separate non-lease components from lease components, and instead account for each lease component and any associated non-lease components as a single lease component.
Where a contract contains a lease component and one or more additional lease or non-lease components, a lessee shall allocate the consideration in the contract to each lease component on the basis of the relative stand-alone price of the lease component and the aggregate stand-alone price of the non-lease components.
For a contract that contains a lease component and one or more additional lease or non-lease components, a lessor shall allocate the consideration in the contract by applying guidance in Ind AS 115.
At the commencement date, a lessee shall recognise
(a) a right-of-use asset measured at cost, and
(b) a lease liability measured at the present value of the lease payments that are not paid at that date, 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 shall use the lessee’s incremental borrowing rate.
Cost = Lease Liability + Lease payments made at or before the commencement date – lease incentives received at or before the commencement date + initial direct costs + estimated dismantling and restoration costs.
Lease Payments = Fixed payments (including in-substance fixed lease payments) – lease incentives receivable + variable payments that depend on an index or a rate, initially measured using the index or rate as at the commencement date + amounts expected to be payable by the lessee under residual value guarantees + exercise price of purchase option (if reasonably certain to be exercised) + penalties for termination (if reasonably certain to be terminated).
In-substance fixed lease payments are payments that may, in form, contain variability but that, in substance, are unavoidable.
Subsequently, the right-of-use asset shall be measured by applying a cost model or revaluation model if the underlying asset belongs to the class of assets to which the entity applies revaluation model as per Ind AS 16, Property, Plant and Equipment.
Subsequent meansurement – Cost model
Lessee shall measure the right-of-use asset at cost less accumulated depreciation and any accumulated impairment losses.
Lessees adjust the carrying amount of the right-of-use asset for remeasurement of the lease liability, unless the carrying amount has already been reduced to zero.
Subsequent measurement of lease liability
After initial recognition, the lease liability is measured at amortised cost using the effective interest method and remeasuring the carrying amount to reflect any reassessment or lease modifications or to reflect revised in-substance fixed lease payments.
Reassessment of lease liability
After the commencement date, a lessee shall remeasure the lease liability in accordance with the standard (using a revised discount rate or an unchanged discount rate as applicable) to reflect changes to the lease payments. A lessee shall recognise the amount of the remeasurement of the lease liability as an adjustment to the right-of-use asset. However, if the carrying amount of the right-of-use asset is reduced to zero and there is a further reduction in the measurement of the lease liability, a lessee shall recognise any remaining amount of the remeasurement in profit or loss.
After the commencement date, a lessee shall recognise in profit or loss, unless the costs are included in the carrying amount of another asset applying other applicable Standards, both:
(a) interest on the lease liability; and
(b) variable lease payments not included in the measurement of the lease liability in the period in which the event or condition that triggers those payments occurs.
A lessee shall account for a lease modification as a separate lease if both:
(a) the modification increases the scope of the lease by adding the right to use one or more underlying assets; and
(b) the consideration for the lease increases by an amount commensurate with the stand-alone price for the increase in scope and any appropriate adjustments to that stand-alone price to reflect the circumstances of the particular contract.
Where a lease modification is not accounted for as a separate lease, at the effective date of the lease modification a lessee shall:
(a) allocate the consideration in the modified contract;
(b) determine the lease term of the modified lease; and
(c) remeasure the lease liability by discounting the revised lease payments using a revised discount rate. The lessee shall account for the remeasurement of the lease liability by:
(a) decreasing the carrying amount of the right-of-use asset to reflect the partial or full termination of the lease for lease modifications that decrease the scope of the lease. The lessee shall recognise in profit or loss any gain or loss relating to the partial or full termination of the lease.
(b) making a corresponding adjustment to the right-of-use asset for all other lease modifications.
A lessee shall either present in the balance sheet, or disclose in the notes:
(a) 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 shall:
(i) 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; and
(ii) disclose which line items in the balance sheet include those right-of-use assets.
(b) lease liabilities separately from other liabilities. If a lessee does not present lease liabilities separately in the balance sheet, the lessee shall disclose which line items in the balance sheet include those liabilities.
The above requirement does not apply to right-of-use assets that meet the definition of investment property, which shall be presented in the balance sheet as investment property.
In the statement of profit and loss, a lessee shall present interest expense on the lease liability separately from the depreciation charge for the right-of-use asset.
A lessor shall classify each of its leases as either 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 ownership of an underlying asset. A lease is classified as an operating lease if it does not transfer substantially all the risks and rewards incidental to ownership of an underlying asset.
In a sub-lease transaction, the intermediate lessor accounts for the head lease and the sub-lease as two separate contracts. An intermediate lessor classifies a sublease with reference to the right-of-use asset arising from the head lease.At the commencement date, a lessor shall recognise assets held under a finance lease in its balance sheet and present them as a receivable at an amount equal to the net investment in the lease.
At the commencement date, a manufacturer or dealer lessor shall recognise the following for each of its finance leases:
(a) revenue being the fair value of the underlying asset, or, if lower, the present value of the lease payments accruing to the lessor, discounted using a market rate of interest;
(b) the cost of sale being the cost, or carrying amount if different, of the underlying asset less the present value of the unguaranteed residual value; and
(c) selling profit or loss (being the difference between revenue and the cost of sale) in accordance with its policy for outright sales to which Ind AS 115 applies. A manufacturer or dealer lessor shall recognise selling profit or loss on a finance lease at the commencement date, regardless of whether the lessor transfers the underlying asset as described in Ind AS 115.
Subsequently, a lessor in a finance lease shall recognise 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.
A lessor shall recognise lease payments from operating leases as income on either a straight-line basis or another systematic basis. The lessor shall apply another systematic basis if that basis is more representative of the pattern in which benefit from the use of the underlying asset is diminished. A lessor shall present underlying assets subject to operating leases in its balance sheet according to the nature of the underlying asset.
Lease Payments = Fixed payments (including in-substance fixed lease payments) – lease incentives payable + variable payments that depend on an index or a rate, initially measured using the index or rate as at the commencement date + residual value guarantees provided to the lessor by the lessee + exercise price of purchase option (if lessee is reasonably certain to exercise) + penalties for termination (if lease term reflects same).
Gross investment in the lease = lease payments + unguaranteed residual value.
Net investment in the lease = The gross investment in the lease discounted at the interest rate implicit in the lease.
Sale and leaseback transactions
Determine whether transfer of asset is a sale of that asset as per requirement of Ind AS 115
Transfer of asset is a sale
Transaction will be accounted for as a sale and a lease by both the lessee and the lessor.
- Measure right-of-use asset at proportion of previous carrying amount of asset relating to right-of-use asset retained by seller-lessee.
- Recognise only amount of gain or loss relating to rights transferred to buyer-lessor.
- Account for purchase of asset applying applicable standards.
- Account for lease applying lessor accounting requirements under Ind AS 116.
Transfer of asset is a not a sale
Transaction will be accounted for as a financing arrangement by both the seller-lessee and the buyer-lessor.
- Continue to recognise transferred asset.
- Recognise financial liability equal to transfer proceeds applying Ind AS 109.
- Not recognise transferred asset.
- Recognise financial asset equal to transfer proceeds applying Ind AS 109.
A lessee shall disclose the following amounts for the reporting period:
a. depreciation charge for right-of-use assets by class of underlying asset;
b. interest expense on lease liabilities;
c. the expense relating to short-term leases. This expense need not include the expense relating to leases with a lease term of one month or less;
d. the expense relating to leases of low-value assets. This expense shall not include the expense relating to short-term leases of low-value assets included in paragraph 53(c);
e. the expense relating to variable lease payments not included in the measurement of lease liabilities;
f. income from subleasing right-of-use assets;
g. total cash outflow for leases;
h. additions to right-of-use assets;
i. gains or losses arising from sale and leaseback transactions; and
j. the carrying amount of right-of-use assets at the end of the reporting period by class of underlying asset.
A lessor shall disclose the following amounts for the reporting period:
(a) for finance leases:
(i) selling profit or loss;
(ii) finance income on the net investment in the lease; and
(iii) income relating to variable lease payments not included in the measurement of the net investment in the lease.
(b) for operating leases, lease income, separately disclosing income relating to variable lease payments that do not depend on an index or a rate.
A lessor shall provide a qualitative and quantitative explanation of the significant changes in the carrying amount of the net investment in finance leases.
A lessor shall disclose a maturity analysis of the lease payments receivable, showing the undiscounted lease payments to be received on an annual basis for a minimum of each of the first five years and a total of the amounts for the remaining years. A lessor shall reconcile the undiscounted lease payments to the net investment in the lease.
Transition date accounting
Definition of lease
On the date of initial application of Ind AS 116, companies have an option not to reassess its previously identified leases contracts (as per Ind AS 17, Leases) and apply the transition provisions of this standard to those leases. Also, they have an option not to apply this Standard to contracts that were not previously identified as containing a lease applying Ind AS 17.
If an entity chooses the above options then it shall disclose that fact and apply the practical expedient to all of its contracts.
Transition accounting: In the books of Lessee
A lessee is permitted to:
- adopt the standard retrospectively; or
- follow a modified retrospective approach.
A lessee applies the election consistently to all of its leases.