Under the existing rules as per IND AS 17 (Lease), lessees account for leases either as operating leases or as finance leases, depending on complex rules and tests. These, in practice, use ‘bright-lines’ resulting in all or nothing being recognized on-balance sheet for lease transactions that are sometimes economically similar.

1. New rules as per IND AS 116

While for the new lease model, The Institute of Chartered Accountants of India (ICAI) has issued an ‘Exposure Draft’ on Ind AS 116, providing guidance on accounting for leases, which is largely converged with IFRS 16: Leases issued by the International Accounting Standards Board.The new standard requires lessees to recognize nearly all leases on their balance sheets, reflecting their right-to-use an asset for a period of time and the associated liability for payments. All lease liabilities are to be measured with reference to an estimate of the lease term, including certain optional lease periods.

2. Effective date

As per MCA Notification No. G.S.R. 273 (E) dated 30.03.2019, Companies (Indian Accounting Standards) Rules, 2015 have been amended on 30.03.2019, by inserting Ind AS 116: Leases which is corresponding to IFRS 16: Leases. This Ind AS 116 has replaced existing Ind AS 17: Leases, and accordingly single lease accounting model for lessee by eliminating the classification of leases as either operating leases or  finance leases. An entity shall apply this standard for annual reporting periods beginning on or after 1^st April,2019.

3. Exemptions

There are optional exemptions for leases of terms less than 12 months and low-value assets. These do not have to be recognized on the balance sheet but can continue to be accounted as an operating lease similar to today.

4. Treatment in books of accounts

The rent expense will be replaced by depreciation and interest expense in the income statement, similar to finance leases today. The lease liability is measured in subsequent periods using the effective interest rate method and the ROU asset is depreciated, done on a straight-line basis or another systematic basis, like other fixed assets today. The carrying amount of the ROU asset will, in general, be below the lease liability amount – resulting in the so-called effect of ‘front loading’ of lease expense, explained in the chart below. This might decrease earnings and equity immediately after entering a lease, compared to an operating lease today.

“The new model will gross-up balance sheets, increase leverage, and change the income statement and cash-flow profile.” Due to this reason, services of a professional like chartered accountant is to be availed. AKGVG & Associates, being one of the Ind AS implementing firm in India, can provide you with required advisory and ensure smooth transition of effects due to replacement of Ind AS 17 with Ind AS 116.

Disclaimer : This content is meant for information only and should not be considered as an advice or opinion, or otherwise. AKGVG & Associates does not intend to advertise its services through this.