LEASES

Presented By:
Kalani &
A RT E R E D A C C O U N TA N T S
CA Amit Kumar Chopra

Co.
Inspires people to grow with a rich history – dating back to 1952.
 SCOPE
SHORT-TERM An entity shall apply this Standard to all leases, including leases of
 At the commencement date, right-of use assets in a sublease, except for:
have a lease term of 12 months a) leases to explore for or use minerals, oil, natural gas and
or less. similar nonregenerative resources;
b) leases of biological assets within the scope of Ind AS 41,
 Purchase option NOT a short- Agriculture, held by a lessee;
term. c) service concession arrangements within the scope of
Appendix D, Service Concession Arrangements, of Ind AS
115, Revenue from Contracts with Customer;
LOW VALUE d) licences of intellectual property granted by a lessor within
 New, regardless actual age of leased
the scope of Ind AS 115, Revenue from Contracts with
asset. Customers; and
 Regardless to the materiality to
e) rights held by a lessee under licensing agreements within
lessee. the scope of Ind AS 38, Intangible Assets, for such items as
motion picture films, video recordings, plays, manuscripts,
a) benefit from use of the underlying patents and copyrights.
asset on its own or together with
other resources that are readily A lessee may, but is not required to, apply this Standard to
available to the lessee; and leases of intangible assets other than those described in
paragraph 3(e).
b) underlying asset is not highly
dependent on, or highly interrelated
with, other assets
Recognition Exemptions
In addition to the above scope exclusions, a lessee can elect not
Kalani & Co. to apply Ind AS 16’s recognition and requirements to:
(a) Short-term leases; and
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Identif
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 IDENTIFYING A LEASE
Is there an Does the
identified lessee Does the
asset that obtain lessee have
Leas A contract is, or contains, a
the Yes substantially Yes the right to Yes
e lease if the contract conveys
customer all the direct use of
has the economic the asset? the right to control the
right to use? benefits? use of an identified asset
for a period of time in
No No No exchange for
consideration.
The contract does not contain a lease
A contract conveys the right
to control the use of an
identified asset if,
throughout the period of use,
Identified Asset the customer has the right
No, if the supplier has a substantive right to substitute to:
the asset throughout the period of use.
1) obtain substantially all
 Practical Ability to substitute
 Economically beneficial by doing such substitution of the economic
benefits
Eg. – Rail Wagons, Optic Fibre. 2) direct the useKalani
of the
& Co.
Obtaining Economic RIGHT TO DIRECT THE USE OF THE ASSET
Benefits
Who directs how and for
substantially all of the economic what purpose the asset
benefits from use of the asset. is used throughout the
period of use?
In assessing whether a customer
has a right to substantially all the
economic benefits from the use of
an identified asset, the assessment Pre-
should be made based on the determined
Supplier Customer
due to nature
asset’s use within the defined scope
of asset
of the contract.

Economic benefits from use of the

asset include its primary outputs No Lease Conditions Lease
(e.g. finished goods for a
manufacturer to sell) and by
products, including potential cash For an asset where the relevant decisions are pre-determined,
flows that are derived from these the contract contains a lease if:
items. (a) The customer has the right to operate the asset (or to direct
others to operate the asset in a manner that it determines)
When considering economic throughout the period of use, without the supplier having the
benefits, emphasis should be right to change those operating instructions; or
placed on the benefits derived from (b) The customer designed the asset (or specific aspects of the
using the asset rather than on other asset) in a way that predetermines how and for what
Kalani & Co.
incidental benefits. purpose the asset will be used throughout the period of use.
 A customer enters into a 5-year contract
Separation of Lease Components : Lease & Non Lease with a supplier where the customer will
Component purchase up to 100% of the energy
produced by a bio-mass facility. The
Lessee may apply a practical expedient by class of underlying asset, energy must be produced from this
and ignore the requirement to separate non-lease components (such particular facility and the supplier does
as services) from the lease components. Instead it may account for not have substantive substitution rights to
provide energy from a separate facility.
the entire contract as a single lease contract.
Alternative arrangements can only be
made in extraordinary circumstances (for
If Practical Expedient is not used: example, emergency situations rendering
a) Lessee must allocate the consideration paid between Lease & the facility inoperative). Under the
non Lease component contract the customer tells the supplier
b) Basis for the same will be their relative stand-alone prices. how much energy to produce and when to
produce it and the supplier must stand
ready to operate the facility to meet the
customer’s needs. To the extent there is
spare capacity, the supplier is not allowed
to generate energy for sale to other
Combining Contracts customers. The supplier must therefore
Combination of contracts is required when: stand ready to provide all of the power
output to the customer if needed. The
(a) The contracts are negotiated as a package with an overall
supplier designed the facility when it was
commercial objective that cannot be understood without constructed some years before entering
considering the contracts together;  Nointo
decisions
the contracttowith
bethe
made about
customer, who
(b) The amount of consideration to be paid in one contract whether,
had no when or inhow
involvement that much
original
depends on the price or performance of the other contract; design.
electricity will be produced
or because the design of the asset
(c) The rights to use underlying assets conveyed in the has predetermined those decisions.
contracts (or some rights to use underlying assets conveyed Kalani & Co.
in each of the contracts) form a single lease component.
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Lease
Term

Identif
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 Para B34: In determining the lease term and assessing the
DETERMINING THE LEASE TERM
length of the non-cancellable period of a lease, an entity
shall apply the definition of a contract and determine the
The lease term begins on the period for which the contract is enforceable. A lease is no
commencement date (i.e. the longer enforceable when the lessee and the lessor
date on which the lessor makes each has the right to terminate the lease without
the underlying asset(s) permission from the other party with no more than an
available for use by the lessee) insignificant penalty.
and includes any rent-free or
reduced rent periods. It Assessment of Lease Term
comprises: A customer is considering entering into a lease for
(a) The non-cancellable period equipment to manufacture widgets. The lease has
of the lease a 5 year term, with an option exercisable by the
(b)Periods covered by an lessee only to extend the lease for an additional 2
option to extend the lease if years. This means that there is effectively a
the lessee is reasonably termination option for the lessee at the end of year
certain to exercise that 5, but not the lessor. The monthly rental payments
option; and escalate at an industry accepted rate based on
(c) Periods covered by an inflation plus a margin. This escalation also applies
option to terminate the to the additional 2 year period if the lessee
lease if the lessee is exercises its extension option. The customer
reasonably certain not to operates in a remote location where the cost of
exercise that option shipping and installation for pieces of equipment
Kalani & Co. are significant.
 Revisions to the Lease Term
A lessee is required periodically to reassess whether it
is reasonably certain to exercise extension and
termination options and to revise the lease term if
there is a change. The lease term may also change due
to modifications to the lease contract.
Reassessment of Original Estimate Changes in the Remeasurements due to
lease term may occur due to a change in an entity’s Modifications to the
intentions, the entity’s business practice, and other Lease Contract
circumstances unforeseen since it was first estimated.
A lessee is required to reassess the likelihood of it The lease term may be
exercising or failing to exercise options upon the changed if the lessee and
occurrence of an event or a change in circumstances lessor agree to modify the
that: lease contract (as distinct
(a) Is within the control of the lessee; and from re-estimating the
(b)Affects whether the lessee is reasonably certain to lease term due to revising
exercise an option not previously included in the judgments about whether
determination of the lease term, or not to exercise options will be exercised).
an option previously included in its determination of
the lease term.

Revisions to original estimates of the lease term

resulting from reassessments as to the likelihood of Kalani & Co.
exercising options result in remeasurement of the
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Identif Recogni
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RECOGNITION AND MEASUREMENT
At the commencement

Right- of-use asset (ROU) Lease liability (LL)

Payments not paid at
the commencement
 Amount for lease liability  Fixed payments
date
 Lease payments before/ on  Variable Payments (index)
commencement date – lease incentives  Residual value guarantees
 Initial direct costs  Exercise price of purchase option
 Estimate of dismantling costs  Penalties for terminating
Discounted

Interest rate implicit in the lease

Variable  Include in the initial measurement of the lease using the index or rate as at the
payments that
commencement date.
Residual depend on an  Remeasure lease in the period the rate or index changes
Value index or a rate
Guarante
e  Include in the initial measurement of the lease.
In – Substance  Remeasure the lease in the period in-substance fixed payments are changed or are
Fixed Payments
resolved Embedde
d
 Do not include in the initial measurement of the lease. Derivativ
Other Variable
 Recognise in profit or loss when the event or condition that triggers the paymentse
Payments
Kalani & Co. occur.
Example:
Entity M leases a unit in a shopping centre for 5 years. Lease payments are
fixed at CU 150,000 per annum plus a 5% variable payment dependent on Discount Rate on Initial
Entity M’s annual sales revenue. The lessee’s incremental borrowing rate is
Recognition
8%. The retail location has a current fair value of CU 1,300,000 and an
unguaranteed residual value of CU 350,000. The discount rate to use is the rate
implicit in the lease, unless this
Assessment
cannot readily be determined, in
Ind AS 16 first requires the rate implicit in the lease to be used, if it is which case the lessee’s
readily determinable. As Entity M knows the fair value of the property at incremental borrowing rate is
the commencement of the lease and has estimated the fair value of the used instead.
asset at the end of the lease, the rate implicit in the lease agreement can
be calculated. Ind AS 16 defines the ‘interest rate implicit in the lease’ as: Incremental borrowing rate
“The rate of interest that causes the present value of (a) the lease
states that the rate should
payments and (b) the unguaranteed residual value to equal the sum of (i)
the fair value of the underlying asset and (ii) any initial direct costs of the represent what the lessee ‘would
lessor.” have to pay to borrow over a
Based on the facts provided above, the discount rate that causes the similar term and with similar
present value of (a) and (b) to equal the sum of (i) and (ii) is minus security, the funds necessary to
8.52%. If this were used it would result in the lessee recognising interest obtain an asset of similar value to
income rather than interest expense over the lease term. the right-of-use asset in a similar
If the fair value of the property at the beginning and end of the lease are
economic environment.
reasonably determinable and a significant portion (or all) of the lease
payments are variable, the rate implicit in the lease may be negative.
This is because the lease payments in (a) exclude the variable payments An entity’s weighted-average
equal to 5% of sales revenue and therefore do not reflect what the lessor cost of capital (‘WACC’) is
ultimately anticipates to be the ‘true’ return over the lease term. The use generally not appropriate to use
of a negative discount rate in such circumstances is not appropriate, as a proxy for the incremental
because it does not reflect the objective which is to reflect how the borrowing rate because it is not
contract is priced. In addition, it will be very rare that a lessee will have
generally representativeKalani
of the&rate
Co.
information about the lessor’s direct costs and other expectations that
an entity would pay on borrowings.
Cost Model
An entity measures a right-of-
use asset at: –
 Cost;
 Less accumulated Cost Model
amortisation and Ind As 16

MEASUREMENT MODELS
accumulated impairment
losses (recognised in
accordance with Ind AS 36);
 Adjusted for
remeasurements. Revaluation Model
Ind As 16
The right-of-use asset is
amortised over the lease
term, unless the initial
Fair Value Model
recognition contemplates the
Investment
exercise of a purchase option
Property (Ind AS 40)
or the lease transfers
ownership of the underlying
asset to the lessee by the end
of the lease term. In those
cases, the right-of-use asset is
amortised over the useful life
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of the underlying asset.
Remeasurement of Leases
Lease liabilities and right-of-use assets are remeasured in the following In most cases the carrying
situations: amount of the right-of-use asset
Change in is adjusted by the same amount
original  Remeasure lease liability reflecting revised estimate of
assessment of as the adjustment to the carrying
lease term and cash flows
lease term or  Discount revised payment using Current rate value of the lease liability.
purchase/term  Adjust carrying amount of right-of-use asset by the Therefore, there is no immediate
ination same amount so no gain or loss recognised
options
gain or loss, rather the impact of
the revised cash flows impacts
the income statement over the
Change in
estimate of
remaining term of the lease. The
residual 
exception to this general principle
Remeasure lease liability reflecting revised estimate of
guarantee lease term and cash flows is when a reduction in the
 Discount revised payment using Original rate carrying value of the lease
Change in  Adjust carrying amount of right-of-use asset by the liability is greater than the
index or rate same amount so no gain or loss recognised
affecting
carrying value of the related
payments right-of-use asset at the point of
remeasurement, in which case
the asset is reduced to nil and the
excess
Note that prior is recognised
period figures are in
notprofit or
adjusted
loss. remeasurements being
with all of these
accounted for prospectively.
Kalani & Co.
 Lease Modification
Not a Separate Lease:
Modifications – Separate
Leases  Decrease right-of-use asset and lease liability by their
A lease modification is relative amounts compared to the original lease taking
Decrease in
accounted for as a separate scope the difference to P&L
lease if:  Remeasure lease liability using revised discount rate*
 The modification increases with off-set to right-of-use (ROU) asset

the scope of the lease by

adding the right to use one or
more underlying assets; and  Remeasure lease liability using revised discount
 The consideration for the All other
Lease rate*
lease increases by an amount  Remeasure right-of-use asset by same amount
Modification
commensurate with the  No P&L impact
standalone price for the
increase in scope.
* The prevailing incremental borrowing rate at date
If both criteria are met, a lessee of modification is used unless the implicit rate in
would follow the initial the lease is readily determinable.
recognition and measurement of
lease liabilities and right-of-use
assets.
Kalani & Co.
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Identif Recogni
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The requirements for the presentation of lease balances and PRESENTATION
transactions are summarised as follows:
Statement of Statement of Profit Statement of Cash
Financial Position and Loss Flows Para 47 (a)
A lessee shall either present in
 Right-of-use assets:  Interest expense  Cash Payments of the balance sheet, or disclose
present in its own with other finance lease liability as in the notes:
line item or combine costs. financing activities.
with property, plant  Cash payments for
and equipment, with  Amortisation of interest in accordance (a) right-of-use assets
separate right-of-use with Ind AS 7’s separately from other
disclosure.* assets.** requirements for assets. If a lessee does not
interest paid. present right-of-use assets
 Lease liabilities:  Short-term, low-value separately in the balance
present separately and variable lease
sheet, the lessee shall:
or include with payments within
other liabilities and operating activities (i) include right-of-use
disclose which line assets within the same
* Right-of-use
item they have assets that meet the definition of line item as that within
been included.
investment property are required to be grouped with which the corresponding
investment property. underlying assets would
be presented if they
** Ind AS 16 does not require separate presentation of were owned; and
amortisation expense of right-of-use assets on the face of (ii) disclose which line
the income statement, nor does it mandate which line items in the balance
item the amortisation expense should be included (which sheet include those
will in part be driven by whether the entity presents its right-of-use assets.
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expenses ‘by function’ or ‘by nature’). However, the
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Identif Recogni
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 Ind AS16 has extensive disclosure requirements for lessees in both
DISCLOSURE qualitative and quantitative form. Quantitative disclosure
requirements by primary statement include:
Statement
Statement of Statement of
of Cash
Financial Position Profit and Loss
Flows
 Additions to right-  Depreciation for  Total cash
of-use assets. assets by class. flow for
 Carrying value of  Interest expense leases
right-of-use assets on lease liabilities.
at the end of the  Short-term leases
* These disclosures need reporting period by expensed.*
not include leases with class.  Low-value leases
lease terms of one month expensed.*
 Maturity analysis of  Variable lease
or less.
lease liabilities payments
separately from expensed.
other liabilities  Income from
based on Ind AS 7 subleasing.
Financial  Gains or losses
Instrument: arising from sale
Disclosures and-leaseback
Kalani & Co. requirements transactions.
Ind AS 16 requires that the quantitative disclosures
should be presented in a tabular format, unless Qualitative Disclosure
Requirements
another format is more appropriate. To the extent
amounts are included in the carrying amount of  A summary of the nature of
other assets (e.g. interest on lease liabilities the entity’s leasing activities;
 Potential cash outflows the
capitalised into the cost of inventory), this must also
entity is exposed to that are
be disclosed.
not included in the lease
liability, including:
Other disclosure requirements include: i. Variable lease payments;
ii. Extension options and
 For right-of-use assets that meet the definition of termination options;
investment property, the disclosure requirements iii. Residual value
of Ind AS 40, with a few exclusions. guarantees; and
iv. Leases not yet
 For right-of-use assets where the revaluation commenced to which the
lessee is committed.
model has been applied, the disclosure  Restrictions or covenants
requirements of Ind AS 16. imposed by leases; and
 Information about sale-and-
 Where the short-term and/or low-value lease leaseback transactions.
exemptions has been used, that fact as well as
the amount of short-term lease commitments, if
the portfolio of short-term leases that gave rise to
the current period expense is dissimilar to the Kalani & Co.
portfolio of short-term leases to which the lessee
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EFFECTIVE DATE AND TRANSITION

Full Retrospective-
Ind AS 116 is effective for Restate comparatives as if Ind AS
periods beginning on or 116 always applied
Option A
after 1st April 2019. Measure asset as if
Entities may early adopt Modified Retrospective-
Ind AS 116 had
been applied from
the standard, but if they - Leave comparatives as lease
Transiti
elect to do so, they must previously reported commencement
on - Any difference between asset (but using
also adopt Ind AS 115 as Provisio and liability recognised in Incremental
there can be significant n opening retained earnings at borrowing rate at
transition date of transition)
interactions between the Option B
- Carry forward existing finance
two standards. Significant lease liabilities Measure asset at
transitional exemptions - Calculate outstanding liability amount equal to
liability (adjusted
and simplifications are for existing operating leases
for accruals and
using IRR at date of transition
available to entities prepayments)

Kalani & Co.

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victory…..
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