In line with this, MCA wide notification dated 30th March, 2019, made Ind AS 116 effective for accounting periods beginning on or after 1 April 2019. Ind AS 116 supersedes the existing Ind AS 17.
This is a high level summary on Ind AS 116 which will help to familiarize certain concepts. Detailed post with various intricacies and scenario's will be taken up in subsequent posts.
a) Lease presence in the Contract for application of Ind AS 116
b) Application exemption for Ind AS 116
c) Accounting for lessee
d) Accounting for lessor
e) Transition options
f) Simple Example of application of Ind AS 116
Lease presence in the Contract for application of Ind AS 116:
For a contract to qualify as a Lease, it shall convey the right to control the use of an identified asset to lessee for a period of time in exchange for consideration.
Right to control the use of an identified asset can be assessed by considering whether the customer has both of the following throughout the period of use:
a) The right to obtain substantially all of the economic benefits from use of the identified asset and
b) The right to direct the use of the identified asset
Application exemption for Ind AS 116:
Lessee may elect not to apply above recognition principles in case of short-term leases (12 months or less) and leases for which the underlying asset is of low value (such as tablets, computers, small items of office furniture, etc). In such case, the lessee shall recognise the lease payments as an expense on either a straight-line basis over the lease term or another systematic basis which is more representative of the pattern of the lessee’s benefit.
Accounting for lessee:
Under Ind AS 17, Lessee is also required to classify Leases under two categories viz. Operating Lease and Finance Lease.
New Standard requires Lessees to initially recognize a lease liability for the obligation to make lease payments and a right of use asset for the right to use the underlying asset for the lease term.
The lease liability is measured at the present value of the lease payments to be made over the lease term.
The right of use asset is initially measured at the amount of the lease liability, adjusted for lease prepayments, lease incentives received, the lessee’s initial direct costs such as commissions and an estimate cost of restoration, removal and dismantling of an asset.
Lessee increases the lease liability to reflect interest cost and reduce the same to reflect lease payments made over a period. The corresponding right of use asset is depreciated in accordance with the depreciation requirements of Ind AS 16 Property, Plant and Equipment over a tenure of lease.
Accounting for lessor:
The Principles as enunciated in Ind AS 17 largely remains the same viz. Operating Lease and Finance Lease.
Appendix C to Ind AS 116 allows Lessees to choose between two transition approaches, full retrospective approach or the modified retrospective approach which needs to be applied consistently to all leases.
Full retrospective Approach:
Under the full retrospective transition approach, Lessees are required to apply this standard retrospectively to each prior reporting period presented. Further, considering the provisions of Ind AS 8, an opening balance sheet as at the beginning of the preceding period is required to be presented, in addition to the minimum comparative financial statements.
Modified retrospective Approach:
Under Modified retrospective approach, the lessee shall recognise a lease liability on initial application (i.e. April 1, 2019) at the present value of the remaining lease payments, discounted using the lessee’s incremental borrowing rate at the date of initial application. To recognise a right-of-use asset at the date of initial application, the lessee shall choose, on a lease-by-lease basis, to measure that right-of-use asset at either:
a) its carrying amount as if the Standard had been applied since the commencement date or
b) an amount equal to the lease liability, adjusted by the amount of any prepaid or accrued lease payments
Here, the lessee shall not restate comparative information. Instead, the lessee shall recognise the cumulative effect of initially applying this Standard as an adjustment to the opening balance of retained earnings (or other component of equity, as appropriate) at the date of initial application.
Simple Example of application of Ind AS 116:
Summary of Example - 1 (Refer attachment for detailed Ind AS 116 Example)
Total payments - INR 515,000
As per Ind AS 17:
Rent expense - INR 515,000 - Impact to P&L as ''Rent'' as Ind AS 17
As per Ind AS 116:
Depreciation expense - INR 420,391 - Impact to P&L as ''Depreciation'' as Ind AS 116
Finance Cost - INR 94,609 - Impact to P&L as ''Finance Cost'' as Ind AS 116