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Lease contracts are legally and monetarily crucial, because of the huge financial implications they have on the parties’ involved. With an aim to make the principles on lease contracts more progressive and exhaustive, the government, in April 2019, introduced Indian Accounting Standards (Ind-AS) 116, which replaced the Ind AS 17. Launched to establish the key rules for recognition, measurement, presentation and disclosure of leases, the prime purpose of Ind AS 116 is to provide financial statements of lease transactions in a faithful and uncomplicated manner.
Ind AS 116 primarily affects the accounting by lessees and will result in the recognition of almost all leases on the balance sheet. Ind AS 116 introduces a lessee accounting model that requires a lessee to recognise liabilities and assets for all leases, unless the asset is of low value. A person, or an entity, entering into lease contracts with a term of more than 12 months, has to abide by the standards set under Ind AS 116.
See also: All about lease deeds
Applicability of Ind AS 116
Ind AS 116 is applicable to all leases, including leases of right-of-use assets in a sub-lease. However, there are some exceptions and Ind AS 116 is not applicable to some contracts including:
- Leases for the exploration or use of minerals, natural gas, oil and other non-regenerative resources.
- Service concession arrangements that fall under the scope of Appendix [D] of Ind AS 115.
- Licences granted by a lessor of intellectual property that fall under the scope of Ind AS 115.
- Leases of biological assets held by a lessee that fall under the scope of Ind AS 41.
- Rights held under licensing agreements by a lessee that fall under the scope of Ind AS 38, intangible assets, for such items as video recordings, plays, motion picture films, manuscripts, copyrights and patents.
See also: The difference between lease and licence agreements
Difference between Ind AS 17 and Ind AS 116
Ind AS 17 classified leases as finance leases and operating leases. Ind AS 116 does not make this distinction. When compared to Ind AS 17, Ind AS 116 requires detailed disclosure for lessees. Unlike Ind AS 17, Ind AS 116 provides specific provision for lease modification, for the lessor and lessee. Similarly, Ind AS 116 contains additional disclosure requirements for lessors, as compared to Ind AS 17.
Ind AS 116 primarily offers changes in the accounting by lessees and recognises almost all leases on the balance sheet. It removes the distinction between operating and finance leases. It also requires recognition of an asset and a financial liability to pay rentals, for virtually all lease contracts. An optional exemption exists for short-term and low-value leases.
The Ind AS 116 standard does not make any significant change in lessor accounting but for effectuating some differences on the definition of a lease. Under Ind AS 116, a contract is a lease if it conveys the right to control the use of an asset for a particular period of time, in return for money.
On 24 July 2020, the Corporate Affairs Ministry notified the Companies (Indian Accounting Standards) Amendment Rules, 2020. These rules included revisions in Ind AS 116, as well. Keeping in view the COVID-19 pandemic, the amendment by the chartered accountants’ apex body, ICAI, provided lessees with the option to not assess a rent concession occurring as a result of the direct consequence of the pandemic, as a lease modification.
What is a lease according to Ind AS 116?
A contract is a lease, if it conveys the right to control the use of an identified asset, for a particular period of time, in exchange for a consideration. Leases of up to 12 months’ tenure, are excluded from the standard.
Is Ind AS 116 notified by MCA?
Yes, the Ministry of Corporate Affairs (MCA), on March 30, 2019, notified Ind AS 116.
How many Ind AS are there?
There are 39 Indian Accounting Standards issued by the ICAI (Institute of Chartered Accountants of India).
Is IAS 17 still applicable?
The government introduced Ind AS 116, in April 2019, replacing Ind AS 17.