For CFOs
/
Accounting treatment
FOR CFOS
How an operating lease shows up on your books.
What changes on the balance sheet, the P&L and in tax under Indian GAAP (AS 19) and Ind AS 116, explained for finance teams.
AS 19
Indian GAAP
IND AS 116
Ind AS companies
Balance sheet
Not recognised
Right-of-use asset and lease liability
P&L
Lease rent
Depreciation and interest
EBITDA
Reduced by rent
Rent added back
Tax
Rentals deductible
Rentals deductible
START HERE
Which standard applies to you?
Your reporting framework decides how a lease appears in your financial statements.
AS 19
Indian GAAP
Generally applies to companies that are not required to follow Ind AS, including many unlisted companies below the Ind AS net worth thresholds.
Lessee treats an operating lease as off balance sheet
Lease rentals are expensed in the P&L, usually on a straight-line basis
Future lease commitments are disclosed in the notes
Ind AS 116
Ind AS companies
Applies to listed companies and to unlisted companies above the Ind AS net worth thresholds, and to their holding, subsidiary and associate companies.
Most leases come on the balance sheet as a right-of-use asset and a lease liability
The P&L shows depreciation on the asset and interest on the liability
Exemptions are available for short-term (12 months or less) and low-value leases
STATEMENT BY STATEMENT
Where the lease shows up.
The same lease, presented in each financial statement under both standards.
AS 19 (Indian GAAP)
Ind AS 116
Balance sheet
No asset or liability recognised for an operating lease
Right-of-use asset and lease liability recognised at the present value of lease payments
Profit and loss
Lease rental charged as an expense
Depreciation on the right-of-use asset plus interest on the lease liability
EBITDA
Lower, because rent is an operating expense
Higher, because rent is replaced by depreciation and interest
Cash flow statement
Rentals shown in operating activities
Principal repayments in financing activities; interest as per your policy
Debt and leverage ratios
Unaffected by the lease
Lease liability is included in obligations, which can raise debt-to-equity
Profit over the term
Even expense each year
Higher expense in early years, lower later, same total
TAX AND GST
Tax doesn't follow the accounting.
For income tax, what matters is the legal form of the lease, not how it's presented in your accounts.
Income tax
Under an operating lease, lease rentals are generally claimed as a business expense, whichever accounting standard you follow. The lessor, as owner, claims depreciation on the asset.
GST
GST is charged on lease rentals. Registered businesses using the asset for business can usually claim input tax credit, subject to the GST rules.
Deferred tax under Ind AS 116
Because the books show depreciation and interest while tax allows the rental, timing differences arise. These are recognised as deferred tax.
BEFORE YOU SIGN
What to share with your auditor.
A short pack that helps your auditor confirm the treatment before the lease starts.
01
The draft master rental agreement and rental schedule
02
Lease term, renewal and purchase options
03
Rental amounts and any escalation
04
The asset's cost and expected useful life
05
Your incremental borrowing rate, if you report under Ind AS
This page is general information, not accounting or tax advice. Treatment depends on your reporting framework, the lease terms and the facts of each transaction. Confirm with your auditor and tax adviser.
Questions about your treatment?
Our team works with finance heads every day. We'll walk you and your auditor through how a lease will be reported.