Scope
The standard applies to all leases, including leases of right-of-use assets in a sublease, except for:
(a) Leases to explore for or use minerals, oil, natural gas and similar non-regenerative resources;(b) Leases of biological assets within the scope of Ind AS 41, Agriculture held by a lessee;(c) Service concession arrangements within the scope of Appendix D, Service Concession Arrangements of Ind AS 115, Revenue from Contracts with Customer;(d) Licences of intellectual property granted by a lessor within the scope of Ind AS 115, Revenue from Contracts with Customers; and(e) Rights held by a lessee under licensing agreements within the scope of Ind AS 38, Intangible Assets for such items as motion picture films, video recordings, plays, manuscripts, patents and copyrights.
A lessee may, but is not required to, apply Ind AS 116 to leases of intangible assets other than those described in point (e) above. This Standard specifies the accounting for an individual lease. However, as a practical expedient, an entity may apply this Standard to a portfolio of leases with similar characteristics if the entity reasonably expects that the effects on the financial statements would not differ materially.
Queries
Leases in the financial statements of lessees
Operating Lease
Lease payments under an operating lease shall be recognised as an expense on a straight-line basis over the lease term unless either another systematic basis is more representative of the time pattern of the user’s benefit or the payments to the lessor are structured to increase in line with expected general inflation to compensate for the lessor’s expected inflationary cost increases. In IND AS 116, lease rent is reamed as lease interest. Under section 37 of IT Act, expenses not categorically specified in section 30 to 36, can be allowed as business expenditure, subject to conditions provided u/s 37. Lease rent/ Hirer charges are allowed u/s 37 as deduction and since in IND AS 116 lease rent is renamed as interest on lease and on other hand interest on lease is income for lessor. So considering the accounting treatment of income and expenditure of interest on lease in the account of lessee and lessor, it may be allowed as deduction u/s 37. To claim depreciation u/s 32, two conditions must be satisfied. One is assessee must be owner of that property and second it is used for the purpose of business or profession. Since in operating lease agreement, ownership is not transferred to the lessee, it is lying with the lessor. So in this case depreciation is not allowable u/s 32 in the hands of lessee. At the commencement of the lease term, lessees shall recognise finance leases as assets and liabilities in their balance sheets at amounts equal to the fair value of the leased property or, if lower, the present value of the minimum lease payments, each determined at the inception of the lease. The discount rate to be used in calculating the present value of the minimum lease payments is the interest rate implicit in the lease, if this is practicable to determine; if not, the lessee’s incremental borrowing rate shall be used. Any initial direct costs of the lessee are added to the amount recognised as an asset. Minimum lease payments shall be apportioned between the finance charge and the reduction of the outstanding liability. The finance charge shall be allocated to each period during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability. Contingent rents shall be charged as expenses in the periods in which they are incurred. A finance lease gives rise to depreciation expense for depreciable assets as well as finance expense for each accounting period. The depreciation policy for depreciable leased assets shall be consistent with that for depreciable assets that are owned, and the depreciation recognised shall be calculated in accordance with Ind AS 16, Property, Plant and Equipment and Ind AS 38, Intangible Assets. If there is no reasonable certainty that the lessee will obtain ownership by the end of the lease term, the asset shall be fully depreciated over the shorter of the lease term and its useful life.
Leases in the financial statements of lessors
Operating leases
Lessors shall present assets subject to operating leases in their balance sheet according to the nature of the asset. The depreciation policy for depreciable leased assets shall be consistent with the lessor’s normal depreciation policy for similar assets, and depreciation shall be calculated in accordance with Ind AS 16 and Ind AS 38. Lease income from operating leases (excluding amounts for services such as insurance and maintenance) shall be recognised in income on a straight-line basis over the lease term, unless either
another systematic basis is more representative of the time pattern in which use benefit derived from the leased asset is diminished, even if the payments to the lessors are not on that basis; orthe payments to the lessor are structured to increase in line with expected general inflation to compensate for the lessor’s expected inflationary cost increases. If payments to the lessor vary according to factors other than inflation, then this condition is not
Finance leases
Lessors shall recognise assets held under a finance lease in their balance sheets and present them as a receivable at an amount equal to the net investment in the lease. The recognition of finance income shall be based on a pattern reflecting a constant periodic rate of return on the lessor’s net investment in the finance lease. Manufacturer or dealer lessors shall recognise selling profit or loss in the period, in accordance with the policy followed by the entity for outright sales. If artificially low rates of interest are quoted, selling profit shall be restricted to that which would apply if a market rate of interest were charged. Costs incurred by manufacturer or dealer lessors in connection with negotiating and arranging a lease shall be recognised as an expense when the selling profit is recognised.
Sale and leaseback transactions
A sale and leaseback transaction involves the sale of an asset and the leasing back of the same asset. The lease payment and the sale price are usually interdependent because they are negotiated as a package. The accounting treatment of a sale and leaseback transaction depends upon the type of lease involved. Appendix C of IndAS 116 provides guidance (a) for determining whether the arrangement is, or contain, leases that should be accounted for in accordance with Ind AS 116; (b) when the assessment or a reassessment of whether an arrangement is, or contains, a lease should be made; and (c) if an arrangement is, or contains, a lease, how the payments for the lease should be separated from payments for any other elements in the arrangement. Appendix A of Ind AS 116 provides guidance on recognition of incentives in an operating lease in the financial statements of lessor and le ssee. The Appendix prescribes that the lessor shall recognise the aggregate cost of incentives as a reduction of rental income over the lease term, on a straight – line basis unless another systematic basis is representative of the time pattern over which the benefit of the leased asset is diminished. The lessee shall recognise the aggregate benefit of incentives as a reduction of rental expense over the lease term, on a straight-line basis unless another systematic basis is representative of the time pattern of the lessee’s benefit from the use of the leased asset.
Difference Between AS 19 and Ind AS 116
Recommended Articles of the lease.
incentives in the case of operating leases, and evaluating the substance of transactions having the legal form of a lease and determining whether such an arrangement contains an element of lease.
Ind AS 40 Investment PropertyIND AS 36 Impairment of AssetsIndAS 1 Presentation of Financial StatementCA Final RTPIndAS 7 Statement of Cash FlowsIndAS 8 Accounting PoliciesCA Final Mock Test PapersPan Card Status
