Ind AS-116 (IFRS and Ind-AS Series Part-2)

Ind AS 116 – The New Leases Accounting Standard

Ministry of Corporate Affairs (MCA) has recently notified Ind AS 116, the new leases accounting standard on 30th March 2019 with the effective date of its application from 1st April 2019 implying from this fiscal year, it shall be mandatory for all companies to follow the Ind AS -116 which replaces the current guidance in Ind AS-17, ‘Leases’.

Major Points:

1. Ind AS 116 has defined a lease as a contract, or part of a contract, that conveys the “Right to Use” an asset (the underlying asset) for a period of time in exchange for consideration.

2. Under Ind AS 116, the lessees (users or tenants) must recognize a lease liability (amount payable) reflecting future lease payments and a ‘Right-of-use asset’ (Being Intangible assets- capitalize the Intangible) for almost all lease contracts.

3. This is a significant change as compared to earlier Ind AS 17, under which lessees were required to make a distinction between a finance lease (on balance sheet- assets) and an operating lease (off balance sheet- expense only as rentals paid).

4. Ind AS 116 also gives lessees optional exemptions for certain short-term leases (1 year or less) and leases of low-value assets (small photocopiers or small value items).

The accounting by lessors will not significantly change though. Like earlier under Ind AS 17, the lessor will continue to classify leases as either finance or operating, depending on whether substantially all of the risks and rewards incidental to ownership of the underlying asset have been transferred. This process will be now similar to the new standard also.

Ind AS 116 adds significant new, enhanced disclosure requirements for both lessors and lessees.

1. On transition, lessees have a choice between

a) full retrospective application or
b) a simplified approach that includes certain reliefs and does not require a restatement of comparatives.
In addition, as a practical expedient entities are not required to reassess whether a contract is, or contains, a lease at the date of initial application (that is, such contracts are ‘grandfathered’).

2. Certain exemptions (not to apply this lease new accounting):

a. Less than 1 year
b. If the assets are small in values (computers etc)

3. No classification of leases (into operating or finance lease) by the Lessee. To capitalize both

4. At the inception of lease , he will create a Lease Asset and also a Liability corresponding to that.

5. The Lease Liability must also include the following:

Lease Liability

Lease Liability

6. The accounting on both sides must take care of the following:

7. For the Lessors, nothing much changes from the previous standard. It means, you must classify the lease first and based on the classification, the accounting will happen. Operating, you will take into Income and finance lease, Lease Receivable and then reduce by the amount recd.

8. At the inception of lease , we must answer this question (same as earlier standard )

Classification of Leases

Classification of Leases

9. Nature wise, if any condition is fulfilled, it shall be a Finance lease otherwise a operating lease only This must be done at the inception of lease only.

10. For Lessor, the accounting shall remain the same only like earlier. For the sake of completion, let me complete this by mention of how it is done.

11. For subsequent measurements /payments,

12. For Operating Leases, the Lessor will depreciate the asset also

13. Just in case, there is a sale and lease back transaction, then following shall be done.

Sale and Lease Back

Sale and Lease Back

Note – IFRS 16 is Ind AS-116 and IFRS-9 is Ind AS 109.

Let’s take an example of a Lease assets:

1. Say Lease expense is 25,000 per month or 3lacs a year

2. Lease is of 3 years

3. Let’s make a table of Discounting and amortization. For discounting, rate are G-Sec rate (10 years Govt sec rate in India) Here it is taken at 6.7%

Using the above data, following table is created:

  G Sec Rate 0.937207123 0.878357191 0.823202616    
    FY FY FY    
Rentals 3 years agreement 2019-20 2020-21 2021-22   Total
25:00.00 12 12 12   36  
Full Value 300000 300000 300000   900000  
  Fair Value 281162 263507 246961   791630
Year Opening Lease Asset (A) Lease Payment Fair value calculation (B=A*6.7%) Decrease in Lease Liability Closing Lease Liablity  
2019-20 791630 300000 53039 246961 544669  
2020-21 544669 300000 36493 263507 281162  
2021-22 281162 300000 18838 281162 -1  
Total   900000 108370      
Year   Ind AS-116 Difference (Impact of equity) E=D-A      
  Lease Expense (A) Fair value impact (B) Amortization (C ) Total (D=B+C)    
2019-20 300000 53039 263877 316916 16916  
2020-21 300000 36493 263877 300370 370  
2021-22 300000 18838 263877 282715 -17285  
Total 900000 108370 791630 900000 0

4. Accounting entries are as under:

Accounting Entries:          
  2019 – Year 1   Debit Credit  
Debit Right to Use- Vehicle- Intangibles 791630   Asset creation entry  
Debit fair Valuation on Vehicles- Rights to Use   108370    
Credit Lease Liability to Landlord   900000    
      900000 900000  
           
  2019   Debit Credit  
Debit Amortization – RTU- Vehicles 263877   Amortization entry – year1  
Credit Accumulated Amortization – RTU Vehicles     263877 B/s- Contra asset
      263877 263877  
           
  2019   Debit Credit  
Debit Lease Liability to Landlord 300000   Payment entry- rent  
Credit bank   300000 B/s
      300000 300000  
           
  2019   Debit Credit  
Debit Amortization- fair value- Vehicles- RTU 53039   Fair value entry-year 1  
Credit fair Valuation on Vehicles- Rights to Use     53039 b/s
      53039 53039  
  2020- year 2   Debit Credit  
Debit Amortization – RTU- Vehicles 263877   Amortization entry  
Credit Accumulated Amortization – RTU Vehicles   263877 B/s- Contra asset
      263877 263877  
           
  2020   Debit Credit  
Debit Lease Liability to Landlord 300000   Liability entry  
Credit bank     300000 B/s
      300000 300000  
  2020   Debit Credit  
Debit Amortization- fair value- Vehicles- RTU 36493   Fair value entry-year 2  
Credit fair Valuation on Vehicles- Rights to Use     36493 b/s
      36493 36493  
  2021- year 3   Debit Credit  
Debit Amortization – RTU- Vehicles 263877   Amortization entry  
Credit Accumulated Amortization – RTU Vehicles     263877 B/s- Contra asset
      263877 263877  
  2021   Debit Credit  
Debit Lease Liability to Landlord 300000   Payment entry  
Credit bank     300000 B/s
      300000 300000  
  2021   Debit Credit  
Debit Amortization- fair value- Vehicles- RTU 18838   Fair value entry-year 3  
Credit fair Valuation on Vehicles- Rights to Use     18838 b/s
      18838 18838  
  2020-21- year 3 end   Debit Credit  
Debit Accumulated Amortization – RTU Vehicles 791630   Asset reversal entry –end period  
Credit Right to Use- Vehicle- Intangibles   791630    
      791630 791630

In summary of entries:

A) We created an asset.

B) We amortized over the period the asset value.

C) Fair value impact also amortized over period.

D) At the end, assets life is over, and asset is also reversed.

Related Link:

IFRS and Ind AS – Practical Aspects In India- Series Part-1

Summary
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Ind AS-116 Working Note - India
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Description
Read this article as it will help people in the implementation of Ind AS 116. It will also help various companies in the implementation of IND AS and IFRS.