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Definition of a lease
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A lease is a contract, or part of a contract, that conveys the
right to control the use of an underlying asset for a period of time in
exchange for consideration. To
determine if the right to control has been transferred to the customer, an
entity shall assesses whether, throughout
the period of use, the customer has the right to obtain substantially
all of the economic benefits from use
of the identified asset and the right to direct the use of the identified asset.
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Ind AS 17 defines a lease as an agreement whereby the lessor
conveys to the lessee, in return for a payment or series of payments, the
right to use an asset for an agreed period of time. Furthermore, Appendix C
of Ind AS 17 Determining whether an Arrangement contains a Lease, it
is not necessary for an arrangement to convey the right to control the use of
an asset to be in scope of Ind AS 17.
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Recognition exemptions
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Short term leases-lessees
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Lessees can elect, by class of underlying asset to which the
right of use, relates, to apply a method similar to Ind AS 17 operating lease
accounting, to leases with a lease
term of 12 months or less and without a purchase option
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Not applicable
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Leases of low value assets- lessees
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Lessees can elect, on a lease-by-lease basis, to apply a method
similar to Ind AS 17 operating lease accounting, to leases of low-value
assets (e.g., tablets and personal computers, small items of office furniture
and telephones).
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Not applicable
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Classification
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Lease classification-lessees
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Lessees apply a single recognition and measurement approach for
all leases, with options not to recognise right-of-use assets and lease
liabilities for short-term leases and leases of low-value assets.
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Lessees apply a dual recognition and measurement approach for
all leases. Lessees classify a lease as a finance lease if it transfers
substantially all the risks and rewards incidental to ownership. Otherwise a
lease is classified as an operating lease.
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Measurement
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Lease payments included in the initial measurement-lessees
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At the commencement date, lessees (except short-term leases and
leases of low-value assets) measure the lease liability at the present value
of the lease payments to be made over the lease term. Lease payments include:
a. Fixed payments (including in-substance fixed payments), less
any lease incentives receivable
b. Variable lease payments that depend on an index or a rate,
initially measured using the index or rate at the commencement date
c. Amounts expected to be payable by the lessee under residual
value guarantees
d. The exercise price of a purchase option if the lessee is
reasonably certain to exercise that option
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At the commencement of the lease term, lessees recognise finance
leases as assets and liabilities in their statements of financial position 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. Minimum lease payments are the payments over the lease term
that the lessee is or can be required to make, excluding contingent rent,
costs for services and taxes to be paid by and reimbursed to the lessor,
together with, for a lessee, any amounts guaranteed by the lessee or by a
party related to the lessee. Variable
lease payments are not part of the lease liability.
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e. Payments of penalties for terminating the lease, if the lease
term reflects the lessee exercising an option to terminate the lease
The cost of the right-of-use asset comprises:
a. The lease liability
b. Lease payments made at or before the commencement date, less
any lease incentives received
c. Initial direct costs
d. Asset retirement obligations, unless those costs are incurred
to produce inventories
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No assets and liabilities are recognised for the initial
measurement of operating leases.
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Reassessment of lease liability-lessees
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After the commencement date, lessees shall remeasure the lease
liability when there is a lease modification (i.e., a change in the scope of
a lease, or the consideration for a lease that was not part of the original
terms and conditions of the lease) that is not accounted for as a separate
contract.
Lessees are also required to remeasure lease payments upon a
change in any of the following:
• The lease term
• The assessment of whether the lessee is reasonably certain to
exercise an option to purchase the underlying asset
• The amounts expected to be payable under residual value
guarantees
• Future lease payments resulting from a change in an index or
rate
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Not dealt with by current Ind AS
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Lease modifications
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Lease modifications to an operating lease-lessors
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Lessors account for a modification to an operating lease as a
new lease from the effective date of the modification, considering any
prepaid or accrued lease payments relating to the original lease as part of
the lease payments for the new lease.
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Not dealt with by current Ind AS
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Lease modifications which do not result in new separate
leases-lessees and lessors
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Lessees:
a) Allocate the consideration in the modified contract
b) Determine the lease term of the modified lease
c) Remeasure the lease liability by discounting the revised
lease payments using a revised discount rate with a corresponding adjustment
to right-of-use asset
In addition, lessees recognise in profit or loss any gain or
loss relating to the partial or full termination of the lease.
Lessors:
If a lease would have been an operating lease, had the
modification been in effect at the inception date, lessors in a finance
lease:
i. Account for the
modification as a new lease
ii. Measure the carrying
amount of the underlying asset as the net investment in the lease immediately
before the effective date of the modification.
Otherwise the modification is accounted for in accordance with
Ind AS 109 Financial Instruments.
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Not dealt with by current Ind AS
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Presentation and disclosure
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Presentation-lessees
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Statement of financial position-present right-of-use assets
separately from other assets. If a lessee does not present right-of-use
assets separately in the statement of financial position, the lessee is
required to include right-of-use assets within the same line item as that
within which the corresponding underlying assets would be presented if they
were owned and disclose which line items in the statement of financial
position include those right-of-use assets.
Lease liabilities are also presented separately from other
liabilities. If the lessee does not present lease liabilities separately in
the statement of financial position, the lessee is required to disclose which
line items in the statement of financial position include those liabilities.
Statement of profit or loss-present interest expense on the
lease liability separately from the depreciation charge for the right-of-use
asset. Interest expense on the lease liability is a component of finance
costs, which paragraph 82(b) of Ind AS 1 Presentation of Financial
Statements requires to be presented separately in the statement of profit
or loss.
Cash flow statement – classify cash payments for the principal
portion of the lease liability within financing activities; cash payments for
the interest portion of the lease liability applying the requirements in Ind
AS 7 for interest paid – as operating cash flow or cash flow resulting from
financing activities (depending on entity’s policy); and short-term lease
payments, payments for leases of low-value assets and variable lease payments
not included in the measurement of the lease liability within operating
activities.
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Presentation in the statement of financial position- not dealt
with by current Ind AS
Statement of profit or loss-operating lease expense is presented
as a single item
Cash flow statement- for operating leases, cash payments are
included within operating activities
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Disclosure-lessees and lessors
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Detailed disclosures including the format of disclosure, are
required under Ind AS 116. In addition, qualitative and quantitative
information about leasing activities is required in order to meet the
disclosure objective.
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Quantitative and qualitative disclosures are required, but
generally fewer disclosures are required than under Ind AS 116.
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Sale
and leaseback transactions
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Sale and leaseback transactions determining whether a sale has
occurred
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Seller-lessees and buyer-lessors apply the requirements in Ind
AS 115 to determine whether a sale has
occurred in a sale and leaseback transaction.
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Ind AS 17 focuses on whether the leaseback is an operating or
finance lease and does not explicitly require the transfer of the asset to
meet the requirements for a sale in accordance with Ind AS 18 for
seller-lessees and buyer-lessors.
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Sale and leaseback transactions accounting by seller-lessees
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The seller-lessee measures the right-of-use asset arising from
the leaseback at the proportion of the previous carrying amount of the asset
that relates to the right-of-use retained by the seller-lessee and recognises
only the amount of any gain or loss that relates to the rights transferred to
the buyer-lessor.
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If a sale and leaseback transaction results in a finance lease,
any excess of sales proceeds over the carrying amount are deferred and
amortised over the lease term.
If a sale and leaseback transaction results in an operating
lease, and it is clear that the transaction is established at fair value, any
profit or loss is recognised immediately.
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Sale and leaseback transactions-accounting by seller-lessees for
transactions not at fair value
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If the fair value of the consideration for the sale of an asset
does not equal the fair value of the asset, or if the payments for the lease
are not at market rates, an entity is required to measure the sale proceeds
at fair value with an adjustment either as a prepayment of lease payments
(any below market terms) or additional financing (any above market terms) as
appropriate.
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If a sale and leaseback transaction results in an operating
lease and the sale price is
• Below fair value – any profit or loss is recognised
immediately except that, if the loss is compensated for by future lease
payments at below market price, it is deferred and amortised in proportion to
the lease payments over the period for which the asset is expected to be used
• Above fair value – the excess over fair value is deferred and
amortised over the period for which the asset is expected to be used
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Business
Combinations
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Business combinations – acquiree is a lessee – initial
measurement
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The acquirer is not required to recognise right-of-use assets
and lease liabilities for leases with a remaining lease term less than 12
months from the acquisition date, or leases for which the underlying asset is
of low value.
The acquirer measures the right-of-use asset at the same amount
as the lease liability, adjusted to reflect favourable or unfavourable terms
of the lease, relative to market terms.
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There is no exemption for leases with a remaining lease term
less than 12 months from the acquisition date, or leases for which the
underlying asset is of low value.
An intangible asset is recognised if terms of operating lease
are favourable relative to market terms and a liability is recognised if
terms are unfavourable relative to market terms.
An intangible asset may be associated with an operating lease,
which may be evidenced by market participants’ willingness to pay a price for
the lease even if it is at market terms.
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