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Considering an operating lease?
Lease machinery, equipment and fit-outs from ₹25 lakh to ₹100 crore.
Check eligibilityWhat Ind AS 116 is
Ind AS 116 replaced Ind AS 17. For lessees, it removes the old split between operating and finance leases, so almost every lease is accounted for the same way. It rests on four ideas.
1
A lease is a contract that gives you the right to control the use of an identified asset for a period, in exchange for payment.
2
At the start of the lease, you record a lease liability: the present value of the rentals still to be paid.
3
You record a right-of-use asset of the same amount, adjusted for upfront payments, incentives and initial direct costs.
4
Over the term, you depreciate the asset and charge interest on the liability, instead of booking rent.
Over the full term, the total charge to profit equals the total rentals. It is front-loaded, though: interest is highest in the early years, when the liability is largest.
When Ind AS 116 applies
It applies to companies that report under Ind AS. Others follow AS 19 under Indian GAAP, which keeps operating leases off the lessee's balance sheet.
WHAT CHANGES
Ind AS 116
AS 19 (Indian GAAP)
Who follows it
Listed and larger unlisted companies
Companies reporting under Indian GAAP
Operating leases on balance sheet
Yes, as a right-of-use asset and a lease liability
No, rentals are expensed as they fall due
Charge in the profit and loss
Depreciation plus interest
Lease rental expense
EBITDA
Higher: rentals sit below it
Lower: rentals reduce it
How a lessee applies it
Measure the lease liability at the present value of the rentals, discounted at the rate implicit in the lease or, if that can't be readily determined, your incremental borrowing rate. Two kinds of lease can stay off the balance sheet.
Short-term leases.
Leases of 12 months or less with no purchase option can be expensed on a straight-line basis.
Low-value assets.
Leases of assets that are low in value when new, such as laptops or small office equipment, can be expensed the same way.
Lessors still classify each lease as operating or finance. Confirm the treatment with your auditor.
Where it shows up
Equipment leased for 60 months
ILLUSTRATIVE
A company leases equipment for 60 months at ₹2 lakh a month, ₹1.2 crore in all. Discounted at 12% a year, the rentals are worth about ₹90 lakh today, so it records a right-of-use asset and a lease liability of about ₹90 lakh. In year one it charges about ₹18 lakh of depreciation and ₹10 lakh of interest instead of ₹24 lakh of rent, so EBITDA is ₹24 lakh higher. The new liability adds to its debt, and in the cash flow statement the principal part of each rental moves to financing activities.