Introduction to IND AS 116

IND AS 116, the lease accounting standard, has revolutionized the way lessees and lessors handle lease transactions. This article explores how IND AS 116 has differentiated lease accounting, particularly in terms of the recognition and measurement of leases.

Overview of IND AS 116

Ind AS 116 provides a comprehensive framework for recognizing, measuring, presenting, and disclosing leases. Its primary objective is to ensure that lessees and lessors provide relevant and reliable information, enabling users of financial statements to understand the impact of leasing activities on the entity's financial position, performance, and cash flows.

IND AS 116 introduces a single lessee accounting model, which recognizes assets and liabilities for almost all lease agreements, thereby removing the distinction between operating and finance leases. This standard will supersede the current Ind AS 17 from April 1, 2019, requiring entities to apply the new standard consistently to contracts with similar characteristics and circumstances.

Lessee Accounting under IND AS 116

The lessee accounting model under IND AS 116 requires recognition of right-of-use assets and lease liabilities for lease terms exceeding 12 months, except for low-value assets where the criteria are met. This model simplifies the treatment of leases, aligning similar lease terms and reducing the compliance burden for entities.

Recognition of Right-of-Use Assets: Lessees are required to measure right-of-use assets similarly to other non-financial assets, such as property, plant, and equipment. This means that depreciation of the right-of-use asset and interest on the lease liability are recognized, reflecting the use and cost of the leased asset over time. Lessees also classify cash repayments of the lease liability into a principal and interest portion, presenting these in the statement of cash flows according to IND AS 7—Statement of Cash Flows.

Detailed Disclosure Requirements: Lessees must provide detailed disclosures under IND AS 116, which go beyond the requirements of IND AS 17. These detailed disclosures aim to enhance the transparency of lease transactions, providing users of financial statements with a clearer understanding of the financial impact of leasing activities.

Lessor Accounting under IND AS 116

Lessor accounting under IND AS 116 maintains a similar approach to that of IND AS 17, with a focus on classifying leases as operating or finance leases. However, IND AS 116 introduces additional disclosure requirements for lessors, such as a maturity analysis of lease payments and a qualitative and quantitative explanation of significant changes in the carrying amount of new investments in finance leases.

Lease Modifications: IND AS 116 includes specific provisions for lease modification, both for lessees and lessors. Unlike IND AS 17, which does not provide guidance on accounting for lease modifications, IND AS 116 ensures that such modifications are appropriately accounted for, maintaining the integrity of financial reporting.

Applicability and Identifying a Lease

IND AS 116 applies to all leases, including leases of right-of-use assets in subleases, with a few exceptions. These exceptions include specific categories of assets and resources that do not fall under the scope of the standard, such as mineral and oil resources, biological assets, and service concession arrangements.

Identifying a Lease: A contract must meet certain conditions to be classified as a lease. These conditions include identifying the asset, obtaining substantial economic benefits, and directing the use of the asset. Lessees are required to recognize right-of-use assets and lease liabilities for lease terms exceeding 12 months, unless the underlying asset is of low value.

Conclusion

The introduction of IND AS 116 has significantly impacted lease accounting by simplifying recognition and measurement, enhancing disclosure requirements, and ensuring consistency in financial reporting. The new standard provides a more transparent and reliable framework for lessees and lessors, enabling better decision-making and enhanced financial reporting.