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Considering an operating lease?
Lease machinery, equipment and fit-outs from ₹25 lakh to ₹100 crore.
Check eligibilityWhat a right-of-use asset is
A right-of-use asset represents the lessee's right to use an asset it does not own. At the start of the lease, Ind AS 116 measures it at cost, built up from four parts.
1
The lease liability: the present value of lease payments not yet paid, discounted at the rate implicit in the lease or the incremental borrowing rate.
2
Lease payments made at or before the start of the lease, less any lease incentives received from the lessor.
3
Initial direct costs: incremental costs of obtaining the lease that would not have arisen without it.
4
Estimated costs of dismantling, removing or restoring the asset or the site, where the lease requires it.
After that, the right-of-use asset is depreciated, usually on a straight-line basis, and tested for impairment. The lease liability is reduced separately as rentals are paid.
When it applies
A right-of-use asset arises when a lessee reports under Ind AS. Companies on Indian GAAP account for operating leases under AS 19 instead.
WHAT CHANGES
Under Ind AS 116
Under AS 19 (operating)
Who it applies to
Companies reporting under Ind AS
Companies on Indian GAAP
On the balance sheet
Right-of-use asset and lease liability
Neither: the lease stays off it
In the profit and loss
Depreciation plus interest
Rentals, usually straight-line
Short or low-value
Can be exempted
Rentals expensed
How it is measured over the lease
Start with the lease liability and add or subtract the other parts to get the opening right-of-use asset. Then depreciate it. The liability accrues interest and falls as rentals are paid, so total expense is higher in the early years.
Depreciation period.
The shorter of the lease term and the asset's useful life. If ownership transfers, or a purchase option is reasonably certain to be exercised, use the useful life instead.
Remeasurement.
If the lease term, payments or an option assessment changes, the lease liability is remeasured and the right-of-use asset is usually adjusted by the same amount.
Discount rates and exemptions involve judgement. Agree the approach with your auditor.
Where it shows up
A hospital records a leased CT scanner
ILLUSTRATIVE
A hospital leases a CT scanner for five years at ₹1 crore a year, paid at the end of each year. At its incremental borrowing rate of 10%, the present value of the five rentals, and so the lease liability, is about ₹3.79 crore. Add ₹6 lakh of initial direct costs and the right-of-use asset starts at ₹3.85 crore. The scanner could last eight years, but ownership does not transfer, so the asset is depreciated over the five-year term: ₹77 lakh a year. With about ₹38 lakh of interest, year one's expense is about ₹1.15 crore, more than the ₹1 crore rental.