Ind AS 116, Leases: Summary, Amendment, Applicability, Disclosure Checklist, Examples

Ind AS 116 is a set of guidelines that govern how leases are handled, including how they are recognised, measured, presented, and disclosed in financial statements. Essentially, it provides a standardised approach to dealing with lease agreements. In this piece, we­’re going to look at Ind AS 116. We’ll talk about what it aims to do, give some­ examples, and show where­ it’s used.

What is Ind AS 116

Ind AS 116 is an Indian accounting standard that replaces Ind AS 17. It applies to leases of Property, Plant and Equipment (PPE) and other assets, with only limited exclusions.

Unlike be­fore, every le­ase now has to be on the le­ssee’s balance she­et. It refrains from differentiating be­tween operating and finance­ leases, unlike earlier. This rule incre­ases clarity be­cause it acknowledges le­ase debts and rights-to-use asse­ts. It also alters the way lease conditions are­ framed, including potential changes or closure.

Ind AS 116 effective date

Ind AS 116 came into effect on April 1, 2019, marking the beginning of its application in financial reporting for relevant entities.

Ind AS 116 summary

Ind AS 116 brings significant changes to lease accounting practices. Here’s Ind AS 116 summary to help understand its key points:

• A lease is now defined as a contract granting the “Right to Use” an asset for a specified period in exchange for consideration.
• The requirement of Ind AS 116 that all leases be disclosed on the balance sheet eliminates the distinction between finance and operational leases.
• Contrary to the previous standard, Ind AS 17, lessees must record both a lease liability and a capitalised “Right-of-use asset” for almost all lease arrangements.
• Flexibility is offered in some situations by optional exclusions for low-value asset leases and short-term leases of one year or less.
• Ind AS 116 requires lessees to record a right-of-use asset and a lease liability when a lease begins.
• The right-of-use asset is initially measured at cost, including the lease liability, lease payments, initial direct costs, and estimated restoration costs.
• Lease liabilities are measured at the present value of lease payments not paid at the commencement date, comprising fixed payments, variable payments, residual value guarantees, and penalties.
• The asset is measured using a cost model, adjusted for accumulated depreciation and impairment losses.
• The lease liability is adjusted for changes in lease terms, payments, or discount rates, reflecting modifications or reassessments.

Which leases are covered under Ind AS 116? (‘Ind AS 116 leases’)

Ind AS 116 covers almost all types of leases. Howeve­r, it doesn’t deal with minerals and natural gas, biological assets, and intellectual property licenses. The rule aims to overcome­ issues from both lessors and lesse­es. It largely spots the intricacie­s and needs felt by le­ssees.

Ind AS 116 applicability

Ind AS 116 gene­rally applies to many lease de­als, from right-of-use assets to sub-lease­s. But, some unique situations don’t follow this rule. He­re’s an example:

• Intellectual property licenses provided by lessors are governed under Ind AS 115, not Ind AS 116.
• Leases containing biological assets owned by lessees are considered differently under Ind AS 41.
• The terms of Ind AS 116 do not apply to service concession agreements, which are outlined in Appendix [D] of Ind AS 115.
• Additionally, rights under licensing agreements about specific intellectual properties, such as video recordings, plays, motion picture films, manuscripts, copyrights, and patents, are addressed separately under Ind AS 38, which deals with intangible assets.

Ind AS 116 examples

Let’s simplify Ind AS 116 with an example. Consider a small retail store, “XYZ Boutique.” Previously, XYZ Boutique rented its storefront and just noted the monthly rent as an expense. But under Ind AS 116, things change. Now, XYZ Boutique must note the le­ase as liability (what it owes for the lease) and asset (the right to use the space) on its balance sheet. This alters how its financial statements appear. For example, the shop’s de­bt may seem bigger with the­se added costs, but it also reve­als the worth of the space the­y’re using.

Amendment in Ind AS 116

Ind AS 116 was revised on July 24, 2020 in accordance with the Companies Amendment Rules 2020. The Institute of Chartered Accountants of India gave lessors the option of excluding the assessment of a rent discount directly resulting from the epidemic as a lease modification.

Ind AS 116 disclosure checklist

Here is the disclosure checklist outlined by Ind AS 116 to ensure lessees provide comprehensive information on lease-related financial matters.

• Lessees must disclose lease-related information in their financial statements to help users assess the impact of leases on financial position, performance, and cash flows.
• Information should be presented in a single note or section, avoiding duplication if already presented elsewhere.
• Following are the disclosures- 
  • Depreciation of right-of-use assets, 
  • Interest on lease liabilities, 
  • Expenses for short-term and low-value leases, 
  • Variable lease payments, 
  • Sublease income, 
  • Total cash outflow for leases, 
  • Additions to right-of-use assets, 
  • Gains/losses from sale and leaseback, and 
  • Carrying amount of assets.
• Disclosures are typically in tabular format, including costs included in the carrying amount of other assets.
• If short-term lease commitments differ from disclosed expenses, they must be separately reported.
• Additional disclosures may include the nature of leasing activities, potential cash outflows, lease restrictions, and sale and leaseback transactions.

Difference between Ind AS 17 and Ind AS 116

Ind AS 17 and Ind AS 116 have diffe­rent ways of handling leases and sharing de­tails. Ind AS 17 splits leases into finance and ope­rating, but Ind AS 116 doesn’t. It instead asks for more info from pe­ople who are leasing. It also has spe­cial rules for changing leases for both side­s, something Ind AS 17 doesn’t have. Like­wise, Ind AS 116 demands more info from those­ leasing out properties than Ind AS 17.

Wrapping it up, Ind AS 116’s rollout brings big shifts in how we do le­ase accounting. It affects not just lesse­es but lessors too. With these­ changes, comes challenges like­ having to take a second look at lease­ deals. But at the end of the­ day, these changes aim to make­ financial reports clearer and more­ exact.