CA Jai Chawla

CA FINAL
7887 7887 05
IND AS 116 - LEASES (Page-1) Most Recent Updates
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Part - 1 Part - 2
APPLICABILITY & SCOPE IMPORTANT DEFINITIONS

1 2 3
Effective from Not applicable to :- Recognition Inception Vs. What Lease? Right to Control
FY 19-20 B.E. - LIC Exemptions to Commencement
onwards Following Leases
A Contract/Part Right to obtain Right to Direct
• Biological Assets (B)
Inception Commencement of Contract Maximum Economic the Use of Asset
• Exploration of (E)
Short Team & Low Value of Lease of Lease Benefits from Use
Minerals, Oils etc
• Licensing arrangements Leases Leases
That given “Right to Lessee Must have
under picture Films, IF IF Earlier of Means Customer can
When Asset is Control” the Use of “Decision Making Rights”
Videos etc (L) (a) Date of Agreement Exclusively use the
• Lease Team 12m • Asset Must actually available Identified Asset that Mostly affect the
• Intellectual Property or Asset through out
or Less have Low Value for Lessee for Use Economic Benefits
Licences (I) (b) Date of Commitment that Period
• Service Concession • Renewal Option • Asset Must be
is not Reasonably Independent by Parties for a period of
Arrangements (C) Time
certain • Asset is not At this date Lease Lessee Must be in
given on Sub-lease Accoutring Starts Economic Benefits :- a position to direct
At this date Lessee shall by Lessee & Lessor (a) Increase in Revenue “How & for What
In exchange of
assess, is there any Lease (b) Realising Rent on Purpose” the asset
Consideration
Contract or Not Sub-leasing is Used
(Lessee must have Right to
Control the Use of Asset)

7 6 5 4
Lease Term Types of Period Period Identified Asset

Sum of Non Cancellable Cancellable Renewal Amount of Use Ø Asset Must be

Period Period Periods of Asset & Physically Distinct
(1) Non-Cancellable Period includes any
Non-Consecutive
(2) Renewal Period Periods of Time Means either
the period for which Option to Option to Renew
(If certain to exercise) (for eg. 3 months in
lease contract is Terminate the for Another
every year)
Enforceable Lease Term
(3) Cancellable Period i.e. Mandatory Explicitly (OR) Implied at
(if certain not to Terminate) Period Specified Commencement
Agreement is Date
not Enforceable +
Ø Supplier must not have
substantive Right to
Substitute the Asset
(Supplier Can-not
Change the Asset)

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 CA Jai Chawla
CA FINAL
7887 7887 05
IND AS 116 - LEASES (Page-2) Most Recent Updates
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Part - 3
BOOKS OF LESSEE
Recognise (a) Right of use Asset ( ROU Asset)
&
(b) Lease Liability

1 2
Initial Recognition Subsequent
Measurement
at BS Date
ROU Asset Lease Liability

ROU Asset Lease Liability

at COST at PV of Remaining
Lease Payments at
Cost means :- Treat this as Financial
IRI*
Apply Cost Model Period of Liability as per Ind AS-109
• Down Payment Lease Payments means :- (Amortised Cost Basis)
or Revaluation model Depreciation
• PV of Lease Payment (L.P.)
• Fixed agreed payments as per Ind AS -16
less Incentive Received
• Initial Direct Cost less Incentives received
• Estimated Cost of • Insubstance Fixed Payments Recognise Interest Reduce Lease Remeasure the Lease Impact on P&L a/c
From Commencement From Commencement
dismantling. • Variable Lease Payments Liability by Amt. • Depreciation on
date to end of Useful date to Remaining useful Expense & Increase Liability Due to :-
depends on Index / Rate only the Liab. of Payment (a) Change in Lease Team ROU asset
life if ownership will be life or Lease Team
• GRV transferred to Lessee (b) Change in Lease Payments • Interest Exp.
(which ever is Lower)
• Purchase Option Price (c) Change in GRV • Variable L.P. not
if no ownership is
• Penalties for Terminating going to be transferred
Interest Exp. A/c Dr. Lease Liab. A/c Dr. (d) Change in Assessment of dependent on
Lease To Lease Liab. A/c To Bank A/c Option to Purchase the asset Index / Rate
• Impairment of
ROU Asset
* IRI = Implicit Rate of Interest

3
Important Definitions

Insubstance Incentives Initial Direct Cost Guaranteed Discounting Rate

Fixed Payment Residual Value
(GRV)
Payment Made by Cost incurred by 1st 2 nd
Variable but this Lessor to Lessee for Lessee to obtain Priority Priority
Variable Payment any Cost or the Asset on Lease At the end of L.Term
is Unavoidable Reimbursement (Unavoidable) the residual value must
Ex:- Transportation Ex:- Commission, be of this Amt, if less IRR Incremental
Exp. Legal Fees etc. than that, Lessee needs of Lessor Borrowing
to Pay the Balance. Also Called as Rate of
Implicit Rate Lessee
of Interest

29
 CA Jai Chawla
CA FINAL
7887 7887 05
IND AS 116 - LEASES (Page-3) Most Recent Updates
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Part - 4
IMPORTANT POINTS FOR LESSEE
1 2 3
“Lease of Multiple Assets” Lease & Non-Lease Contract Combination
Components

Treat Separate • Two or more Contracts

Lease Contract for • Entered with same Party
each Asset if:- To Supply other How to Allocate How to Account for • Entered at same Time
Goods or Services total Consideration Non-Lease Component will be Combined and treated
may be Non-Lease to Lease & Non-Lease as Single Contract if :-
Component Components
Each Asset Provides Each Asset should
As per other applicable (OR) (OR)
Benefits on its own or be Independent
Standards all Contracts Consideration All or Maximum
together with other eg:- Providing Driving In Proportion of
Resources are Negotiated of one depends Rights to Use
Services along with Observable Stand - Alone as a Single Package on Price or the Assets are -
Leasing of a Car Prices of Lease & Performance of Single Lease
Non-Lease Components another Component

5 4
Presentation in F.S. of Lessee Lease Modification

Change in
Balance Sheet Statement of Statement of
P/L Cash Flows

ROU Lease Scope Consideration Lease Term

Asset Liability Depreciation Interest Exp. Lease Short Term Variable Paymts
on ROU on Lease Payments Leases & Low not a part of (OR) (OR)
Asset Liability including Value Lease Lease Payment Additions Terminations Extending Shortening
Present Separately Present Separately Interest of New Rights of some Rights
Or Or of New Assets
Together with Other Together with other Both are All Lease
Presented Operating or on Same Assets
Assets along with Liabilities with disclosure Financing Payments How to Treate Lease Modification?
Separately Activity
disclosure of BS of BS line items that Activity within Operating
Line items that includes includes Lease Liabilities Activity
ROU Assets & Amt. & their Amount. Additional Not Granted
ROU Granted

Price of Additional Price is Affected

ROU is agreed at
Stand Alone Price

Remeasure Lease
Treat New Separate Liability & ROU Asset
Lease Contract

30
 CA Jai Chawla
CA FINAL
7887 7887 05
IND AS 116 - LEASES (Page-4) Most Recent Updates
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Part - 5
BOOKS OF LESSOR
1 2
Classification of Leases Finance Lease

At Inception decide the

Classification of Lease
as either Situations of F/L Initial Recognition
(Satisfy anyone)
Or • Transfer of ownership at the end of Lease Term
Operating Lease Finance Lease Non-Dealer Manufacture / Dealer
• Option to Purchase the Asset at Reduced Price, Lessor Lessor
Reasonable to Certain the Exercisability of Option
a Lease other than where Substential
a Finance Lease Risks & Rewards • Lease Term Covers Major Economic Life of Asset Lease Receivable A/c Dr. (NIL) Initial Direct Cost Lease Receivable A/c Dr. (NIL) Here Initial Direct
are Transferred To Asset a/c (CA) shall be Considered To Sales a/c (Lower of Cost incurred if
• Asset is of Specialized Nature, only Lessee can (difference to P&L a/c) while Calculating IRR FV or PV of LP) any transfer to
use without Major Modification NIL = Net Investment in Lease (difference to P&L ) P&L a/c
CA = Carrying Amt.
• PV of Lease Payments > Fair Value of Asset LP = Lease Payments

3
Operating Lease Key Concepts of F/L Subsequent Recognition (at BS date)

1. Gross Investments in Lease (GIL)

Recognise Income Initial Direct Cost Variable Lease Payments Recognise Finance Receive Payment Lease Receivable A/c
All Lease Payments Receivable Review of UGRV at
not Dependent on Income @ IRR at every BS date
+ UGRV (Total Estimated RV every BS date
Index/Rate shall be equal to PV of
Or Deferred over the Lees GRV) Bank a/c Dr.
On another Systematic Lease term on To Lease Receivable Remaining LP + UGRV
On SLM 2. Net Investments in Lease (NIL)
Basis Basis if that Basis is same Basis as Recognise when
Lease Income they arise PV of (GIL - Initial Direct Cost)
More Representative Lease Receivable A/c Dr. • Reduction in UGRV
i.e. SLM directly in P&L @ IRR
To Fin. Income a/c shall be considered
3. Implicit Rate of Interest (IRR) (transfer to P&L)
Rate at which PV of (LP + UGRV) • Increase in UGRV from org.
should be equal to Fair Value at estimated shall be ignored
Inception

UGRV = Unguaranteed Residual Value

IRR = Internal Rate of Return also called Insplicit Rate of Interest

31
 CA Jai Chawla
CA FINAL
7887 7887 05
IND AS 116 - LEASES (Page-5) Most Recent Updates
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Part - 5
BOOKS OF LESSOR

4 5
Lease of Land & Building Lease Modifications

Separate Allocation of Lease Payment to Modification in Modification in

Classification Land Component & Building Component Operating Lease Fin. Lease

Treat it as If change in
Lease of Land Lease of Building Allocable Reliably Unallocable Addition of New All Other Modif.
New Lease from Classification to Asset
the date of Operating Lease +
Modification
In Proportion to Entire Lease is Stand alone Apply IndAS - 109
Generally Operating May be Finance
their relative Fair Values Classified as Price
Lease Since Land has or Operating Recognise Asset at
indefinite life depends on Situation Finance or Operating
Net Investment in
Based on Building’s
If PV of Lease Payments allocated to Lease & Derecognise Treat Separate
Features
Land is immaterial, the Land & Lease Receivable A/c Lease for Such
Building may be treated New added Asset
as Single Unit & Classified as
Finance or Operating based
on Building’s Features
Part - 6
SUB - LEASES
1 2 3 4
Meaning Books of Intermediate Head Lease Cannot be Presentation
Lessor (Org. Lessee) Classified as Low
value Lease if Intermediate
Asset is Re-Leased Lessor Sub-Leases or expects
by Lessee to to Sub-Lease an Asset. Do not offset & Do not offset
Third Party When Head Lease When Head Lease is not Classified Lease Liability of Depreciation &
is a Short Term Lease as Short Term Lease i.e. ROU asset Org. Lease with Lease Interest Exp. with
Org. Lease = Head Lease & Lease Liability Shown in Books Receivable of Sub-Leasing Income
Org. Lessee = Intermediate Lessor Sub-Lease
Treat Sub-Lease as Sub-Lease
an “Operating Lease” may be
Operating Lease
Since Intermediate Lessor Finance Lease
has not Recognised any
ROU Asset & Lease Liability • De-Recognise ROU Asset • Continue to A/c for ROU Asset & Lease Liability.
in its Books.
Therefore, no question to • Continue to A/c For Org. • Recognise Sub Lease Rent on SLM Basis
Treat Sub-Lease as Lease Liability
“Finance Lease” • If CA of ROU Asset is more than the anticipated
• Recognise “Net Investment Sublease Income then ROU Asset May be Impaired
in Lease” as Lease Receivable

32
 CA Jai Chawla
CA FINAL
7887 7887 05
IND AS 116 - LEASES (Page-6) Most Recent Updates
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Part - 7
SALE & LEASE BACK

Treatment of Sale Transaction

Control is Passed i.e. Control is not Passed i.e. Transfer

Sale / Purchase Transaction of Asset is not a Sale

Do not apply
Seller Lessee Buyer Lessor Ind AS 116

• Recognise ROU Asset at this value - • Recognise Purchase Treat the entire Transaction
of Asset as Finance Arrangement
as per Ind AS - 109
CA X PV of LP
FV of Asset • Classify the Lease as
Finance or Operating
• De-Recognise the depends on situations
Main Asset at CA
Seller - Lessee Buyer - Lessor
• Recognise Lease Liab.
at PV of LP • Treat the Proceeds Received • Treat the Proceeds Paid
as Financial Liability as per as Financial Asset
• Recognise the Gain/Loss Ind AS - 109. (Ind AS 109)
on Sale as Under-
• Recognise Interest Exp. • Recognise Interest Income
Total - Total G/L X PV of LP @ ERI (%) @ ERI (%)
G/L FV of Asset
• Continue to Recognise the • Do not Recognise any
Total G/L = FV - CA Underlying Asset & Charge Tangible Asset
Depreciation accordingly
• Journal Entry :-
Bank a/c Dr. (Proceeds)
ROU Asset Dr.
To PPE a/c (CA)
To Lease Liability
To Gain on Sale

33