The Ministry of Corporate Affairs on 24 July 2020, notified the Companies (Indian Accounting Standards) Amendment Rules, 2020 which includes revisions in Ind AS 116: Leases. The amendment includes a practical expedient that provides lessees with a choice not to assess a rent concession occurring as a result of the direct consequence of the Covid-19 pandemic as a lease modification.
- Ind AS 116 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.
- Ind AS 116 will replace current Ind AS 17 Leases, from its proposed effective date 1 April 2019.
- An entity shall apply this Standard consistently to contracts with similar characteristics and in similar circumstances.
Major changes in Ind AS 116
Ind AS 116 introduces a single lessee accounting model and requires a lessee to recognise assets and liabilities for all leases with a term of more than 12 months, unless the underlying asset is of low value. A lessee is required to recognise a right-of-use asset representing its right to use the underlying leased asset and a lease liability representing its obligation to make lease payments. Ind AS 17 required to classify leases as finance lease and operating lease, the same in not required under Ind AS 116.
Under Ind AS 116, a lessee measures right-of-use assets similarly to other non-financial assets (such as property, plant and equipment) and lease liabilities similarly to other financial liabilities. As a consequence, a lessee recognises depreciation of the right-of-use asset and interest on the lease liability, and also classifies cash repayments of the lease liability into a principal portion and an interest portion and presents them in the statement of cash flows applying Ind AS 7, Statement of Cash Flows. Under Ind AS 17, for operating leases, lessee is required to recognise the lease payments as an expense on a straight-line basis unless another systematic basis is representative of the time pattern of the user’s benefit.
Ind AS 116 requires detailed disclosure for lessees as compared to Ind AS 17.
Requirements with regard to lessor accounting are substantially similar to accounting requirements contained in Ind AS 17. Accordingly, a lessor will continue to classify its leases as operating leases or finance leases, and to account for those two types of leases differently.
Ind AS 116 contains additional disclosure requirements for lessors as compared to Ind AS 17, such as, disclosure of maturity analysis of lease payments; quantitative and qualitative explanation of significant changes in carrying amount of new investment in finance leases etc
Ind AS 116 contains specific provision for lease modification for lessor and lessee. Ind AS 17 does not specifically provide how to account for lease modification.
This standard applies to all leases, including leases of right-of-use assets in a sublease, except for:
- 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, held by a lessee
- Service concession arrangements within the scope of Appendix D, Service Concession Arrangements, of Ind AS 115, Revenue from Contracts with Customer
- Licenses 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
Note: A lessee may, but is not required to, apply this Standard to leases of intangible assets other than those described in above point (v)
Identifying a lease:
Below conditions need to be fulfilled if the contract is to be classified as lease:
- Identified asset.
- Lessee obtains substantially all of the economic benefits.
- Lessee directs the use.
- A Lessee will recognise assets and liabilities for all leases for a term of more than 12 months, unless the underlying asset is of low value.
- A Lessee is required to recognise a right of use asset representing its right to use the underlying leased asset and a lease liability representing its obligations to make lease payments.
- A lessee will measure right-of-use assets similarly to other non-financial assets (such as property, plant and equipment) and lease liabilities similarly to other financial liabilities.
- A lessee recognises depreciation of the right-of-use asset and interest on the lease liability (as per IND AS 17 the same was classified as rent in case of operating lease on a straight-line basis)
- Lease liability = Present value of lease rentals + present value of expected payments at the end of lease. The lease liability will be amortised using the effective interest rate method.
- Lease term = non-cancellable period + renewable period if lessee reasonably certain to exercise.
- Right to use asset = Lease liability + lease payments (advance)-lease incentives to be received if any initial + initial direct costs + cost of dismantling/ restoring etc. The asset will be depreciated as per IND AS 16 Property plant and equipment.
A lessee shall either present in the balance sheet, or disclose in the notes:
- Right-of-use assets separately from other assets.
- Lease liabilities separately from other liabilities.
- 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.
- For operating leases, lessors continue to recognize the underlying asset.
- For finance leases, lessors derecognize the underlying asset and recognize a net investment in the lease.
- Any selling profit or loss is recognized at lease commencement.
Transition to Ind AS 116:
- Retrospectively to each prior reporting period presented applying IND AS 8 i.e. 1 April 2018.
- Retrospectively with the cumulative effect of initially applying the standard on application date i.e. 1 April 2019.
Kindly refer the PPT for basic practical example of Ind AS 116 and its impact.