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IND AS 116, LEASES THE IMPACT

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OVERVIEW

Lessee accounting will undergo a transformation with the applicability of the new standard on

leases, Ind AS 116- Leases. Ind AS 116, which substantially converges with IFRS 16 on leases, requires a

lessee to recognize all leases in the balance sheet, with few exemptions. The new standard brings a significant

change in approach from current Ind AS 17 and will affect many entities across various sectors. Ind AS 116 is

effective for annual periods beginning on or after April 1, 2019.

Ind AS 116, introduces a single lessee accounting model and requires a lessee to recognize assets and liabilities

for all leases with a term of more than 12 months, unless the underlying asset is of a low value. A lessee is

required to recognize 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.

APPLICABILITY

Applies to all leases, including leases of right-of-use

assets in a sublease barring the ones mentioned

below:

Leases to explore for or use minerals, oil, natural

gas and similar non-regenerative resources

Leases of biological assets

Service concession arrangements

Licenses of intellectual property granted by lessor

Rights held by a lessee under certain licensing

agreements (e.g. films)

TRANSITION

As a practical expedient, an entity is not required

to reassess whether a contract is, or contains, a

lease, at the date of initial application. Instead, the

entity is permitted to apply this Standard to

contracts that were previously identified as leases

applying Ind AS 17, Leases.

Alessee shall apply this Standard to its leases

either -

Retrospectively to each prior reporting period

presented applying Ind AS 8; or

Retrospectively with the cumulative effect of

initially applying the standard recognised at the

date of initial application.

A lessor is not required to make any adjustments

on transition for leases and shall account for those

leases applying this standard from the date of

initial application.-1-

LESSEE ACCOUNTING

Lease liability isinitially recognisedand

measured at an amount equal to thepresent

value of minimum lease paymentsduring the

lease term that are not yet paid.

Right-of-use asset is recognised and measured

at cost, consisting of initial measurement of

lease liability plus any lease payments made to

the lessor at or before the commencement date

less any lease incentives received, initial

estimate of the restoration costs and any initial

direct costs incurred by the lessee.

The lease liability is measured insubsequent

periodsusing theeffective interest ratemethod.

The right- of-use asset is depreciated in

accordance with the requirements in Ind AS 16,

Property, Plant and Equipment.

Recognition and measurement exemptionis

available forlow-value assets and short-term

leases.

If an entity chooses to apply any one of the

exemptions, payments are recognised on a

straight-line basis or another systematic basis

that is more representative of the pattern of the

lessee's benefit.

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

Requirements with regard to lessor accounting are substantially similar to accounting requirement

contained in Ind AS 17. A lessor will continue to classify its leases as operating leases or finance leases, and to

account for those two types of leases differently.

Post transition companies with

operating leases will appear to

be more asset-rich, but will also

appear to be more heavily

indebted.

De-recognition of operat-ing

lease charges and recognition

of depre-ciation and finance

costs would positively impact

EBITDA.

Recognition of depre-ciation

on right-of-use assets and

unwinding of finance costs on

lease liabilities result in higher

costs being recognised during

the beginning of the lease

term.

Presentation of lease payments

as 'cash flow from financing

activities' has a favourable

impact on 'cash flows from

operations'.

BALANCE SHEET PROFIT & LOSS CASH FLOWS

KEY IMPACT

-2-

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EXAMPLE

Consider a case where a lease commences on January 1, 2010 and lease rental payment per

annum is INR 40 Lakhs. The lease deed also contains 10% escalation clause in every three years.

Assuming an interest rate of 10%, the workings are as under – (INR in lakhs)

PRESENT VALUE MINIMUM LEASE PAYMENTS RECOGNITION OF LEASE

-3-

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

TOTAL

40.00

40.00

40.00

44.00

44.00

44.00

48.40

48.40

48.40

53.24

450.44

0.91

0.83

0.75

0.68

0.62

0.56

0.51

0.47

0.42

0.39

YEAR LEASE DISCOUNTING FACTOR P.V. OF LEASE PAYMENTS

36.40

33.20

30.00

29.92

27.28

24.64

24.68

22.75

20.33

20.76

269.96

LIABILITY

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

269.96

256.96

242.66

226.92

205.61

182.18

156.39

123.63

87.60

47.95

27.00

25.70

24.27

22.69

20.56

18.22

15.64

12.36

8.76

5.29

40.00

40.00

40.00

44.00

44.00

44.00

48.40

48.40

48.40

53.24

YEAR LEASE LIABILITY INTEREST PAYMENT NET BALANCE

256.96

242.66

226.92

205.61

182.18

156.39

123.63

87.60

47.95

0.00

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-4-

IMPACT ASSESSMENT UNDER CURRENT IND AS 17 AND NEW IND AS 116 (INR. IN LAKHS)

N/A

N/A

N/A

N/A

N/A

N/A

N/A

N/A

N/A

N/A

N/A

27.00

27.00

27.00

27.00

27.00

27.00

27.00

27.00

27.00

27.00

27.00

25.70

24.27

22.69

20.56

18.22

15.64

12.36

8.76

5.29

-8.95

-7.65

-6.22

-4.64

-2.51

-0.17

2.41

5.68

9.29

12.76

* Right of use asset

Ind AS 17 requires lease payments to be recognised as an expense on a straight line basis and hence the

burden of expense is distributed equally during the entire period of the lease. However, Ind AS 116

requires recognition of depreciation and interest expense in Profit &Loss Account, instead of lease

rentals recognised earlier.Accordingly,expenses in initial periods would be higher as compared to the

later periods.

Hence, transition to Ind AS 116 would result in a higher EBIDTAas lease rental expense is replaced by

interest & depreciation.The new standard represents a major change in accounting for leases and is

expected to have a wide-ranging and significant impact on financial reporting of entities.

Ind AS 17 Ind AS 116 IMPACT ON

PROFITABILITYBALANCE

SHEETP&L P&L

BALANCE SHEET

Depreciation Interest Exp.YEAR

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

Total Exp.

53.99

52.69

51.26

49.69

47.56

45.21

42.64

39.36

35.76

32.28

ROU*

269.96

242.97

215.97

188.97

161.98

134.98

107.99

80.99

53.99

27.00

0.00

Lease Exp.

45.04

45.04

45.04

45.04

45.04

45.04

45.04

45.04

45.04

45.04

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