The Ministry of Corporate Affairs (MCA) has notified Ind AS 116, the new Indian Accounting Standard on Leases as on 30th March 2019. This Ind AS -116 replaces the current guidance in Ind AS-17, ‘Leases’. This amendment is effective from on 1st April 2019.
Ind AS Definition:
Ind AS-116 defines 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.Thus, Ind AS 116 has enhanced disclosure requirements for both lessors and lessees as compare to Ind AS 17.
Leases to be considered:
As per Ind AS 17, lessees need to be distinguished between the finance leases and operating leases (depending on whether substantially all of the risks and rewards incidental to ownership of the underlying asset have been transferred) while under Ind AS- 116 lessees have to be recognized a lease liability reflecting future lease payments and a ‘right-of-use asset’ for almost all lease contracts. Further, in addition Ind AS 116 gives lessees optional exemptions for certain short-term leases and leases of low-value assets.
Impact on Profit and Loss Statements:
As per Ind AS 17, interest expense on the lease liability and depreciation on the right of-use asset will be presented in the books of lessees. Payments for short-term leases, leases of low-value assets and variable lease payments not included in the measurement of the lease liability are presented within operating activities. Thus, Ind AS-116, will have material impact on the profit and loss statement. Since total expenses will be higher in starting period of leases and will reduce in later period.
However, 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.
Approach on Transition:
On transition, lessees have the option either to calculate the impact with full retrospective application or a simplified approach which includes certain reliefs and does not require a restatement of comparatives.
All entities with leases, or arrangements where significant judgement has been made in assessing whether it contains a lease, will need to consider their disclosure of the expected impact of Ind AS 116. Entities without leases should consider disclosing the fact that Ind AS 116 is not expected to impact them.
Posted by: Avinash Agarwal
Designation: Managing Partner
Organization: AKGVG & Associates
Mobile no: +91-9818314719