Ind AS 116 replaced Ind AS 17 for annual periods beginning on or after 1 April 2019. For companies that apply Ind AS, a lessee generally recognises a right-of-use (ROU) asset and lease liability, subject to scope and recognition exemptions. Lessor classification into finance and operating leases continues. The examples below are fictional and round rupee amounts only for presentation.
Identify the lease at inception; recognise it at commencement
At contract inception, assess whether the arrangement conveys control over use of an identified asset for a period in exchange for consideration. Commencement is when the lessor makes the asset available for use, and is the normal recognition date. Reassess whether the contract contains a lease only if its terms and conditions change.
- An identified asset may be explicit or implicit. A supplier’s substitution right prevents identification only if the supplier can practically substitute the asset and would benefit economically throughout the period of use. If the customer cannot readily determine that a substitution right is substantive, it presumes that it is not.
- The customer must obtain substantially all economic benefits from use and direct how and for what purpose the asset is used. If those decisions are predetermined, assess the operating rights or whether the customer designed the asset in a way that predetermined its use.
Measure the liability and the asset
Measure the lease liability at the present value of payments unpaid at commencement. Use the rate implicit in the lease if readily determinable; otherwise use the lessee’s incremental borrowing rate (IBR). Calibrate the IBR to comparable term, security, amount needed for an asset of similar value and economic environment.
- Include fixed and in-substance fixed payments net of incentives receivable, index- or rate-linked payments using the commencement index or rate, expected residual value guarantee payments, reasonably certain purchase options and termination penalties when the lease term reflects exercising the termination option.
- The ROU asset generally starts with the liability, plus payments at or before commencement net of incentives received, qualifying initial direct costs and the relevant restoration estimate. Initial direct costs are incremental costs that would not have been incurred if the lease had not been obtained.
- Where the lease creates a qualifying restoration obligation, recognise a provision separately under Ind AS 37. Assess whether the related cost belongs in the ROU asset or in inventory where the obligation arises from using the asset to produce inventory during a period.
Set the lease term and check exemptions
Start with the enforceable non-cancellable period. Include extension periods when reasonably certain to be taken and termination-option periods when reasonably certain that termination will not be exercised. Assess economic incentives and both parties’ enforceable rights; a lease ceases to be enforceable when both parties can terminate without the other’s permission and with no more than an insignificant penalty. Reassess as required by paragraphs 20–21.
A short-term lease has a lease term of 12 months or less at commencement and no purchase option; elect by class of underlying asset. The low-value election is lease by lease, based on the value when new, ability to benefit independently and interdependence with other assets. A head lease that is subleased or expected to be subleased does not qualify. Ind AS 116 sets no fixed USD threshold. For exempt leases, recognise payments over the lease term on a straight-line or other more representative systematic basis.
Subsequent accounting and modifications
Increase the liability for interest, reduce it by payments and remeasure where required. Under the cost model, depreciate and assess impairment of the ROU asset and adjust it for applicable remeasurements. If ownership transfers or the cost reflects a reasonably certain purchase option, depreciate through the useful life of the underlying asset. Otherwise use the earlier of the ROU asset’s useful life and the lease term, applying Ind AS 16 to the depreciation method.
A change under the original terms, such as an index reset, is not automatically a modification. Apply the relevant reassessment rules, including when a revised rate is required. For a negotiated modification, first determine whether it is a separate lease.
| Modification | Separate lease? | Accounting |
|---|---|---|
| Adds rights to use one or more assets at commensurate stand-alone pricing | Yes | Account for the added rights separately. |
| Adds rights but not at commensurate pricing | No | Allocate revised consideration, determine the term and remeasure at a revised rate; adjust the ROU asset. |
| Surrenders part of the scope | No | Reduce the ROU asset and liability for the rights terminated, recognise any related gain or loss, and remeasure the remaining liability with a corresponding ROU adjustment. |
| Only extends the term or changes contractual consideration | Normally no | Apply the modified lease term and revised discount rate when it is a modification; adjust the ROU asset. |
Presentation, cash flows and financial ratios
| Item | Legacy operating-lease presentation | Ind AS 116 lessee treatment |
|---|---|---|
| Balance sheet | Operating leases under Ind AS 17 and AS 19 generally did not create a lease asset or finance lease liability. | Recognise ROU assets and lease liabilities for in-scope, non-exempt leases; present separately or identify relevant line items as required. |
| Profit or loss | Operating rent generally expensed on a straight-line or appropriate systematic basis. | Recognise depreciation and interest; exempt lease costs and excluded variable payments can still be expensed. |
| Cash flows | Operating lease rent generally shown in operating activities. | Principal in financing. Classify interest under Ind AS 7: generally financing for non-financial entities and operating for financial institutions. Short-term, low-value and excluded variable lease payments go to operating activities. |
| Ratios | Rent commonly reduces EBITDA. | EBITDA often rises relative to previous operating-lease accounting, while recognised obligations rise. EBIT, PBT, leverage and covenant impacts depend on the facts and metric definitions. |
| Item at commencement | ROU asset | Lease liability |
|---|---|---|
| Rent paid on or before commencement | Include | Exclude amount already paid |
| Incentive already received | Deduct | Exclude amount already received |
| Incentive receivable with future payments | Flows through liability | Deduct in lease payment stream |
| Incremental costs conditional on obtaining lease | Include | No addition |
| Qualifying restoration estimate | Include where applicable | Separate provision, not lease liability |
Six worked examples
1. Five-year office lease in arrears
An office lease begins on 1 April 2024 for five years with ₹12 lakh payable each 31 March. Assume the implicit rate is not readily determinable, the IBR is 9%, ₹1 lakh of costs qualify as incremental and the lessor pays a ₹1.50 lakh lease incentive at commencement. The five factors are 0.91743, 0.84168, 0.77218, 0.70843 and 0.64993. Their sum before rounding is approximately 3.88965.
Initial liability is ₹46,67,582 and initial ROU cost is ₹46,17,582. Assume straight-line depreciation over five years, or about ₹9,23,516 annually. The schedule uses unrounded amounts, so displayed rows may differ by a rupee when added.
| Year | Opening liability | Interest at 9% | Payment | Closing liability | Depreciation plus interest |
|---|---|---|---|---|---|
| 1 | ₹46,67,582 | ₹4,20,082 | ₹12,00,000 | ₹38,87,664 | ₹13,43,599 |
| 2 | ₹38,87,664 | ₹3,49,890 | ₹12,00,000 | ₹30,37,554 | ₹12,73,406 |
| 3 | ₹30,37,554 | ₹2,73,380 | ₹12,00,000 | ₹21,10,933 | ₹11,96,896 |
| 4 | ₹21,10,933 | ₹1,89,984 | ₹12,00,000 | ₹11,00,917 | ₹11,13,500 |
| 5 | ₹11,00,917 | ₹99,083 | ₹12,00,000 | ₹0 | ₹10,22,599 |
The first-year charge of ₹13,43,599 is ₹1,43,599 above the fixed cash rent; the final-year charge is ₹10,22,599. Over five years, depreciation plus interest totals ₹59.50 lakh, equal to ₹60 lakh rent plus ₹1 lakh initial costs less ₹1.50 lakh incentive. The expense-to-rent difference does not directly determine deferred tax.
2. Advance rent and restoration
An eight-year store lease requires ₹25 lakh each year in advance, with the first payment at commencement. At an 8.5% IBR, the factor for the remaining seven payments is 5.11851 and the initial liability is ₹1,27,96,284. Assume a qualifying restoration payment of ₹15 lakh at the end of year eight and an independently supported Ind AS 37 discount rate of 8.5%. The present value is ₹7,81,004.
Initial ROU asset is ₹1,60,77,288, comprising liability, advance rent and the separate restoration provision. The annual straight-line depreciation over eight years is approximately ₹20,09,661, and first-year unwinding of the provision is approximately ₹66,385.
3. Partial surrender
At the start of year four of a six-year lease, the parties agree to surrender 10,000 of 20,000 sq. ft. Assume the equal-value space reduction represents 50% of the rights, the ROU asset is ₹30 lakh and the liability is ₹36 lakh. Derecognise ₹15 lakh of the asset and ₹18 lakh of liability, recognising a ₹3 lakh gain.
The remaining liability of ₹18 lakh is remeasured to ₹16 lakh, assumed to be the present value of revised payments at an 8% revised rate. Credit the asset by the ₹2 lakh reduction in liability. The remaining ROU asset is ₹13 lakh.
4. Short-term and low-value elections
- Warehouse: an 11-month lease without a purchase option qualifies if its enforceable term is 11 months. With the class election and total ₹10 lakh rent, straight-line expense is approximately ₹90,909 per month, adjusted for rounding.
- Laptops: 100 independently usable units valued at ₹40,000 each when new. Assume each meets the low-value criteria and the election is made. Expense ₹15 lakh per year over three years (₹45 lakh total). The aggregate rent does not set the low-value test.
- Trucks: a three-year lease of heavy trucks at ₹30 lakh annually does not qualify for these exemptions. The ₹90 lakh total undiscounted rent is not the initial liability; discount payments at the appropriate rate.
5. Minimum rent and sales-based rent
A five-year lease requires ₹10 lakh in arrears annually plus any excess of 8% of annual sales over that base. Sales of ₹2 crore in year one give a formula rent of ₹16 lakh and excess of ₹6 lakh. Include the ₹10 lakh fixed floor in the liability. Exclude the genuinely sales-dependent excess and recognise it when the triggering sales occur, unless another standard requires including it in the cost of another asset.
At an illustrative 8% rate, the fixed-rent liability is ₹39,92,710. If there are no other ROU adjustments and the asset is depreciated straight-line over five years, annual depreciation is ₹7,98,542 and first-year interest is ₹3,19,417. The ₹6 lakh excess is separate.
6. Sale and leaseback
On 1 April 2024, assume a plant with ₹10 crore carrying value is sold at its ₹15 crore fair value and leased back for ten years at market terms of ₹1.80 crore each year in arrears. Assume the transfer qualifies as a sale under Ind AS 115 and the appropriate rate is 8%. The lease payment PV is ₹12,07,81,465.
Using that PV to measure retained rights in this on-market example, about 80.521% is retained and 19.479% transferred. The ROU asset is ₹8,05,20,977 and only ₹97,39,512 of the ₹5 crore theoretical gain is recognised, corresponding to the transferred rights. No separate gain is recognised for the retained rights.
| Entry | Debit | Credit |
|---|---|---|
| Cash | ₹15,00,00,000 | — |
| ROU asset | ₹8,05,20,977 | — |
| Plant | — | ₹10,00,00,000 |
| Lease liability | — | ₹12,07,81,465 |
| Gain on transferred rights | — | ₹97,39,512 |
| Total | ₹23,05,20,977 | ₹23,05,20,977 |
Check for off-market adjustments under paragraphs 101–102. For subsequent measurement, paragraph 102A, applicable for annual periods beginning on or after 1 April 2024, prevents recognition of a gain or loss on the retained right through measurement of lease payments, while preserving the treatment of partial or full termination. If the transfer is not a sale, the seller-lessee keeps the asset and recognises a financial liability for the proceeds.
Controls and disclosures
- Maintain a register of contracts, embedded leases, incentives and renewal rights. Document rate inputs and compare them with available financing terms.
- Reconcile additions, payments, index resets, modifications and term reassessments to the ledger. Set review frequency to suit the business.
- Disclose applicable ROU depreciation and carrying amounts by class, lease interest, expense for exemptions and excluded variable payments, cash outflows and other information required by paragraphs 51–60. Present a separate maturity analysis of lease liabilities under Ind AS 107.
Frequently asked questions
1. Does the model automatically breach a debt covenant?
No. Read the facility’s definitions of debt, EBITDA and accounting basis, then reconcile the covenant calculation.
2. Can an ROU asset be revalued?
Under paragraph 35, a lessee applying the Ind AS 16 revaluation model to a class may elect that model for all ROU assets relating to that same class.
3. How are maintenance and lease components treated?
Normally allocate consideration by relative stand-alone prices of each lease component and the aggregate non-lease components. The paragraph 15 election by underlying asset class permits combining the lease component with associated non-lease components, subject to the scope of that expedient.
4. Is dedicated cloud capacity a lease?
Assess whether there is an identified asset and the customer controls its use. A capacity portion may qualify if physically distinct or if it represents substantially all capacity. Assess substantive substitution and direction rights; the label “dedicated” does not determine the outcome.
5. How do initial ROU balances affect deferred tax?
Determine the asset and liability tax bases and the party or item to which the deductions relate. The initial-recognition exemption does not apply where equal taxable and deductible temporary differences arise. Recognise deferred tax under Ind AS 12, subject to the conditions for recognising a deferred tax asset, and offset only if the standard’s criteria are met.
6. Can a lease be recognised without a written agreement?
Assess enforceable rights and obligations under the governing law and evidence. Payment or occupation alone does not prove the claimed term. Section 17 of the Registration Act generally requires registration of leases of immovable property from year to year, for a term exceeding one year or reserving a yearly rent, subject to applicable exceptions and local law. Obtain the facts before deciding the enforceable accounting term.