Library / Technical Accounting Manual: IFRS, IAS and Ind AS Equivalents

IFRS 16 - Leases

Indian equivalent: Ind AS 116 - Leases

Objective and scope

IFRS 16 changed how lessees (parties who rent assets) account for leases: almost every lease now appears on the balance sheet as a right-of-use asset and a lease liability, ending the old practice of hiding rented assets and their obligations off-balance-sheet.

Core principle

Before IFRS 16, companies rented planes, shops and machines for years but kept them off the balance sheet, hiding huge obligations. IFRS 16's rule for lessees: if you have the right to use an asset for a period, show a right-of-use asset and a lease liability - the debt is now visible to everyone.

Defined terms and technical terminology

Term

Technical meaning

Lease

A contract that conveys the right to control the use of an identified asset for a period in exchange for consideration.

Lessee

The party that obtains the right to use the asset.

Lessor

The party that owns and provides the asset.

Right-of-use (ROU) asset

The lessee's asset representing its right to use the leased item over the lease term.

Lease liability

The lessee's obligation to make lease payments, measured at the present value of future payments.

Short-term / low-value exemption

Leases of ≤12 months or of low-value assets may be expensed straight-line instead of capitalised.

Application and worked illustrations

The single lessee model

Under IFRS 16 a lessee no longer splits leases into 'operating' vs 'finance'. For nearly all leases it recognises a right-of-use asset and a matching lease liability at the present value of future lease payments. The asset is then depreciated (usually straight-line), and the liability accrues interest - so the old single 'rent expense' becomes depreciation + interest, front-loading the total expense. (Lessor accounting, by contrast, largely keeps the old operating/finance split.)

Worked example - renting a shop

CafeChain leases a shop for 5 years at ₹5,00,000 per year. The present value of those payments (discounted) is ₹20,00,000. On day one CafeChain recognises a right-of-use asset of ₹20,00,000 and a lease liability of ₹20,00,000.

Journal entry - At commencement of the lease

Account

Debit (₹)

Credit (₹)

Right-of-use asset

20,00,000

Lease liability

20,00,000

Each year it depreciates the asset (₹20,00,000 ÷ 5 = ₹4,00,000) and charges interest on the outstanding liability, while lease payments reduce the liability. The ₹20 lakh commitment is now visible to investors and lenders, instead of buried in a footnote as under the old rules.

The exemptions

To avoid clutter, two shortcuts exist. A short-term lease (≤12 months, no purchase option) and a low-value asset lease (e.g., a laptop, printer, or small office equipment) may simply be expensed straight-line as rent, with no asset or liability recognised.

Common mistake: keeping operating leases off-balance-sheet as under the old IAS 17. For lessees, IFRS 16 brings almost all leases on-balance-sheet.

IND AS LINK

Ind AS 116 is fully aligned with IFRS 16 - the single on-balance-sheet lessee model and both exemptions apply in India.

Further worked illustrations

Extra numeric example - the first year's split into depreciation + interest

Recall CafeChain's 5-year shop lease: right-of-use asset and liability ₹20,00,000, payments ₹5,00,000/year, implicit rate ~8%. Year 1: depreciation = ₹20,00,000 ÷ 5 = ₹4,00,000; interest = 8% × ₹20,00,000 = ₹1,60,000; total expense ₹5,60,000 (vs the old flat 'rent' of ₹5,00,000). The ₹5,00,000 payment reduces the liability by ₹5,00,000 − ₹1,60,000 = ₹3,40,000, leaving ₹16,60,000. Note the expense is front-loaded - higher in early years.

Journal entry - Year 1 - record depreciation and interest

Account

Debit (₹)

Credit (₹)

Depreciation expense (P&L)

4,00,000

Interest expense (P&L)

1,60,000

Accumulated depreciation

4,00,000

Lease liability

1,60,000

INDIAN REGULATORY CONTEXT

Ind AS 116 dramatically reshaped the balance sheets of Indian retail chains and airlines, which lease hundreds of stores and aircraft. Previously off-balance-sheet operating leases now appear as large right-of-use assets and lease liabilities, sharply increasing reported assets and debt - and changing metrics like debt-to-equity that lenders track.

TECHNICAL EDGE CASE

A company signs a contract for 'guaranteed capacity' at a supplier's warehouse, but the supplier can use any of its warehouses to fulfil it and swaps freely. Because there's no identified asset the customer controls, this is a service contract, not a lease - no right-of-use asset arises. IFRS 16 only applies when the contract conveys the right to control the use of an identified asset.

Extended technical analysis

Lessee model, measurement and lessor accounting

IFRS 16 eliminates the lessee operating/finance classification, requiring recognition of a right-of-use asset and a lease liability for substantially all leases. Lessor accounting, by contrast, substantially retains the IAS 17 dual model.

IFRS 16 - Is the Contract a Lease?

◆ Is there an IDENTIFIED ASSET? (explicitly or implicitly specified)

▼

✖ NO - supplier has a SUBSTANTIVE SUBSTITUTION RIGHT → NOT a lease; account as a service contract

▼

◆ YES → Does the customer obtain SUBSTANTIALLY ALL the economic benefits from use?

▼

✖ NO → Not a lease (service contract)

▼

◆ YES → Does the customer have the RIGHT TO DIRECT THE USE of the asset?

▼

✖ NO → Not a lease (service contract)

▼

◆ YES → CONTRACT CONTAINS A LEASE. Apply recognition exemptions?

▼

✔ Short-term (≤12 months) OR low-value asset → Straight-line expense, no ROU asset

▼

■ Otherwise → Recognise RIGHT-OF-USE ASSET and LEASE LIABILITY

Initial and subsequent measurement

The lease liability is measured at the present value of unpaid lease payments discounted at the interest rate implicit in the lease, or where not readily determinable, the lessee's incremental borrowing rate. Payments included are fixed payments (less lease incentives), variable payments dependent on an index or rate, amounts expected under residual value guarantees, purchase option prices reasonably certain of exercise, and termination penalties. Variable payments linked to usage or sales are excluded and expensed as incurred.

The right-of-use asset comprises the initial liability, plus lease payments made at or before commencement, plus initial direct costs, plus restoration obligations, less lease incentives received. It is depreciated over the shorter of lease term and useful life - or over the useful life where ownership transfers or a purchase option is reasonably certain.

Lease Liability Amortisation Schedule (₹20,00,000 liability; 5 years; 8%)

Year

Opening liability

Interest @ 8%

Payment

Closing liability

ROU depreciation

Total P&L charge

1

20,00,000

1,60,000

(5,00,000)

16,60,000

4,00,000

5,60,000

2

16,60,000

1,32,800

(5,00,000)

12,92,800

4,00,000

5,32,800

3

12,92,800

1,03,424

(5,00,000)

8,96,224

4,00,000

5,03,424

4

8,96,224

71,698

(5,00,000)

4,67,922

4,00,000

4,71,698

5

4,67,922

32,078

(5,00,000)

-

4,00,000

4,32,078

Total

5,00,000

(25,00,000)

20,00,000

25,00,000

The schedule demonstrates the front-loading effect: total expense is ₹5,60,000 in Year 1 against ₹4,32,078 in Year 5, whereas straight-line operating lease rent under IAS 17 would have been a constant ₹5,00,000. Over the full term the aggregate charge is identical, but the timing differs, which affects EBITDA (improved, since depreciation and interest sit below it), interest cover and gearing.

Lessor accounting and sale and leaseback

Lessors continue to classify leases as finance (transferring substantially all risks and rewards incidental to ownership) or operating. In a sale and leaseback, the seller-lessee first applies IFRS 15 to determine whether a sale has occurred. If it has, the seller-lessee recognises only the proportion of the gain relating to the rights transferred to the buyer-lessor - not the full gain. If no sale has occurred, the transaction is accounted for as a financing arrangement, with the asset retained and the proceeds recognised as a financial liability.

IFRS vs Ind AS - Comparative Analysis

Aspect

IFRS / IAS position

Ind AS position (carve-out / carve-in)

Lessee model

Single on-balance-sheet model.

Ind AS 116 - fully converged, effective 1 April 2019.

Exemptions

Short-term and low-value asset exemptions.

Identical.

Sector impact

Global.

Substantial balance sheet impact for Indian retail, aviation, telecom and logistics entities; materially altered debt-to-equity and EBITDA metrics used in loan covenants.

Transition

Full retrospective or modified retrospective.

Most Indian entities adopted the modified retrospective approach.

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