Dipesh Bhoir
(student)
(80 Points)
Replied 29 November 2019
Dipesh Bhoir
(student)
(80 Points)
Replied 04 December 2019
Hello Anubhav,
Key difference lies in Lessee accounting as now as per new Ind AS 116, in many of the cases Lessees are going to recognize "Right-of-Use Asset" (ROU Asset) and corresponding "Lease Liability" in all leases except where Lease term is less than 12 months and Asset to be leased have minimal/low value. [Minimal value is no where defined in standard and hence subjective by organization, judgement is required]. There won't be any classification like Finance lease or operating lease in Lessee cases. Whereas in Operating lease under Ind AS 17, Lessees charge lease rent to P&L which is not the case anymore in Ind AS 116.
However Lessor accounting will remain the same with slight change in Lease equalization: Ind AS 17 permitted to recognize lease income to Lessor in operating lease on SLM basis or if Lease rentals are set keeping in mind the utilization of asset, economic benefit, then in that proportion. However Ind AS 116 mandates Straight Line Method of recognition of lease income in Lessor cases i.e. Lease Equalization whether Lease rentals are set keeping in mind the utilization of asset, economic benefit etc.
In Sale and Leaseback also there are changes.
In Ind AS 116, it is possible that in Sale and Lease back cases, Asset sold may not constitute a sale as per Ind AS 115-Revenue from Contracts with customers, (that's separate part of discussion) in that case it is to be treated like entity will continue to recognize that asset and treat consideration received as Financial Liability in accordance with Ind AS 109 Financial Instruments.
But if it constitutes a sale,
[Scene 1] If Sale Price= Fair Value, then Ind AS 116 mandates to recognize ROU Asset in proportion of the Right of Use retained. i.e. it will not allow to recognize asset at Fair Value, but at lower amount because there is some Right retained by Seller-Lessee.
hence ROU Asset to be recognized= (Present Value of Lease payments * Previous Carrying amount of asset)/Fair Value
[Scene 2] If Sale Price > Fair Value, then Excess over fair value is to be accounted as Additional financing i.e. Seller-Lessee with record it as Financial Liability and Buyer-Lessor will record as Financial Asset and this is to be treated separately from Lease Component.
ROU Asset to be recognized= {(Total Present Value of Annual payments-Additional Finance) * Previous Carrying amount of asset/Fair Value }
[Scene 3] If Sale Price < Fair Value, then shortfall to be treated as Lease Prepayment i.e. It is like consideration paid in advance at commencement and present value to be worked accordingly.
I have tried to give brief idea in the most possible short way.
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