Lessee Accounting:
16
Ind AS 116 introduces a single lessee accounting model and requires a lessee to recognise assets and liabilities for all leases with a term of more than 12 months, unless the underlying asset is of low value. A lessee is required to recognise a right-of-use asset representing its right to use the underlying leased asset and a lease liability representing its obligation to make lease payments. Ind AS 17 required to classify leases as finance lease and operating lease, the same is not required under Ind AS 116.
Under Ind AS 116, a lessee measures right-of-use assets similarly to other non-financial assets (such as property, plant and equipment) and lease liabilities similarly to other financial liabilities. As a consequence, a lessee recognises depreciation of the right-of-use asset and interest on the lease liability, and also classifies cash repayments of the lease liability into a principal portion and an interest portion and presents them in the statement of cash flows applying Ind AS 7, Statement of Cash Flows. Under Ind AS 17, for operating leases, lessee is required to recognise the lease payments as an expense on a straight-line basis unless another systematic basis is representative of the time pattern of the user’s benefit.
Ind AS 116 requires detailed disclosure for lessees as compared to Ind AS 17
Lessor Accounting:
Requirements with regard to lessor accounting are substantially similar to accounting requirements contained in Ind AS 17. Accordingly, a lessor will continue to classify its leases as operating leases or finance leases, and to account for those two types of leases differently.
Ind AS 116 contains additional disclosure requirements for lessors as compared to Ind AS 17, such as, disclosure of maturity analysis of lease payments; quantitative and qualitative explanation of significant changes in carrying amount of new investment in finance leases etc.
Ind AS 116 contains specific provisions for lease modification for lessor and lessee. Ind AS 17 does not specifically provide how to account for lease modification.
Identifying a lease:
Below conditions need to be fulfilled if the contract is to be classified as lease:
Identified asset.
● Lessee obtains substantially all of the economic benefits.
● Lessee directs the use.
Lessee Accounting:
Initial recognition:
● A Lessee will recognise assets and liabilities for all leases for a term of more than 12 months, unless the underlying asset is of low value.
● A Lessee is required to recognise a right of use asset representing its right to use the underlying leased asset and a lease liability representing its obligations to make lease payments.
● A lessee will measure right-of-use assets similarly to other non-financial assets (such as property, plant and equipment) and lease liabilities similarly to other financial liabilities.
● A lessee recognises depreciation of the right-of-use asset and interest on the lease liability (as per IND AS 17 the same was classified as rent in case of operating lease on a straight-line basis)
● Lease liability = Present value of lease rentals + present value of expected payments at the end of lease. The lease liability will be amortized using the effective interest rate method.
● Lease term = non-cancellable period + renewable period if lessee reasonably certain to exercise.
● Right to use asset = Lease liability + lease payments (advance)-lease incentives to be received if any initial + initial direct costs + cost of dismantling/ restoring etc. The asset will be depreciated as per IND AS 16 Property plant and equipment.
Presentation:
A lessee shall either present in the balance sheet, or disclose in the notes:
● Right-of-use assets separately from other assets.
● Lease liabilities separately from other liabilities.
Lessor Accounting:
● A lessor shall classify each of its leases as either an operating lease or a finance lease.
● A lease is classified as a finance lease if it transfers substantially all the risks and rewards. incidental to ownership of an underlying asset. A lease is classified as an operating lease if it does not transfer substantially all the risks and rewards incidental to ownership of an underlying asset.
● For operating leases, lessors continue to recognize the underlying asset.
● For finance leases, lessors derecognize the underlying asset and recognize a net investment in the lease.
● Any selling profit or loss is recognized at lease commencement.
