RETHINKING THE IND AS 116 – LEASE STANDARD

We are aware that the above IND AS 116 brings in a new Leases accounting standard where apart from short term and low value leases with other minor exemptions, we have the Assets residing in the books of 2 parties – the Lessor and the Lessee.

Moving from the earlier Ind AS 17 to Ind AS 116, the following are the changes that are occurring from the Lessee’s perspective:

1)    Almost all Leases get recognized on the Balance Sheet as ‘Right of Use assets’ and ‘Lease liability’. The only exception being as already stated – short term and low value leases;

2)    Distinction between Operating and Financial Leases gets eliminated;

3)    Right of Use Assets need to show their depreciation charge for the year separately in the Schedules to the Financial Statements.

For the Lessor there is not much difference in accounting but for the Lessee there is a lot of pain of conversion of the Lease Agreements into ‘Right – Of – Use’ (ROU) Assets and ‘Lease Liability’. Accounting was made to stand on it’s head and the article that follows attempts to highlight the infirmities of the current IND AS 116 and proposes a different solution.

The writer is well aware that IND AS 116 is in a way a reflection of the IFRS standard on ‘Leases’ but as professionals we need to understand the apparent shortcomings.

1)    Shortcoming # 1 – It is