Compiler’s NoteThe Ministry of Company Affairs, on 30th March, 2019, notified Ind AS 116 ‘Leases’. Under Ind AS 116 lessees have to recognise a lease liability reflecting future lease payments and a ‘right-of-use asset’ for all material lease contracts. Almost all companies that adopted Ind AS 116 applied the standard using the modified retrospective approach, with the cumulative effect of initially applying the standard, recognised on the date of initial application. Accordingly, there was no restatement of comparative information; instead, the cumulative effect of initially applying this standard was recognised as an adjustment to the opening balance of retained earnings on the date of initial application (refer to this column in the BCAJ of July, 2020 for illustrative disclosures on the modified retrospective approach).
Given below is an illustration of a company that has adopted the full retrospective approach by restating of previous years’ figures to make them comparable.
NESTLE INDIA LTD. (31ST DECEMBER, 2020)
From Notes forming part of Financial Statements
Leases
Effective 1st January, 2020, the Company has applied Ind AS 116 ‘Leases’ using full retrospective approach recognising the cumulative effect of adopting Ind AS 116 as an adjustment to the retained earnings as on the transition date, i.e., 1st January, 2019. Accordingly, previous year figures have been restated to make them comparable. Ind AS 116 has replaced the existing leases standard, Ind AS 17 ‘Leases’.
The Company assesses whether a contract is or contains a lease at inception of a contract. A contract is or contains a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration.
At the date of commencement of the lease, the Company recognises a right-of-use asset (‘ROU’) and a corresponding lease liability for all lease arrangements in which it is a lessee.
The right-of-use assets are initially recognised at cost, which comprises the initial amount of the lease liability adjusted for any lease payments made at or prior to the commencement date of the lease plus any initial direct costs less any lease incentives. They are subsequently measured at cost less accumulated depreciation and impairment losses, if any. Right-of-use assets are depreciated from the commencement date on a straight-line basis over the shorter of the lease term or useful life of the underlying asset.
The lease liability is initially measured at the present value of the future lease payments. The lease payments are discounted using the interest rate implicit in the lease or, if not readily determinable, using the incremental borrowing rates. The lease liability is subsequently remeasured by increasing the carrying amount to reflect interest on the lease liability, reducing the carrying amount to reflect the lease payments made. A lease liability is remeasured upon the occurrence of certain events such as a change in the lease term or a change in an index or rate used to determine lease payments with a corresponding adjustment to the carrying value of right-of-use assets.
Lease liability and right-of-use assets have been separately presented in the Balance Sheet and lease payments have been classified as financing cash flows.
The Company’s leases mainly comprise of land, buildings and vehicles. The Company leases land and buildings primarily for offices, manufacturing facilities and warehouses.
The Company recognises lease payments as operating expense on a straight-line basis over the period of lease for certain short-term (one month or below) or low value arrangements.
From Notes forming part of Financial Statements
First time adoption, Ind AS 116 ‘Leases’
(i) The Company has adopted Ind AS 116 ‘Leases’ effective 1st January, 2020 using the full retrospective method with a transition date of 1st January, 2019. The impact of the Ind AS 116 adoption on the Balance Sheet as at 31st December, 2019 and 1st January, 2019 is as under:
As at 1st January, 2019
(Rs. in million)
|
Particulars
|
Pre-implementation
of Ind AS 116
|
Implementation
adjustments
|
Post-implementation
of Ind AS 116
|
|
Property, Plant & Equipment
|
24,006.2
|
(1,192.1)
|
22,814.1
|
|
Right of use assets
|
–
|
2,429.4
|
2,429.4
|
|
Others
|
56,874.6
|
–
|
56,874.6
|
|
Total assets
|
80,880.8
|
1,237.3
|
82,118.1
|
|
Other equity
|
35,773.2
|
(122.8)
|
35,650.4
|
|
Others
|
964.2
|
–
|
964.2
|
|
Total equity
|
36,737.4
|
(122.8)
|
36,614.6
|
|
Non-current lease liabilities
|
–
|
960.4
|
960.4
|
|
Current lease liabilities
|
–
|
440.9
|
440.9
|
|
Deferred tax liabilities (net)
|
588.2
|
(41.2)
|
547.0
|
|
Trade payables
|
12,403.7
|
–
|
12,403.7
|
|
Others
|
31,151.5
|
–
|
31,151.5
|
|
Total equity and liabilities
|
80,880.8
|
1,237.3
|
82,118.1
|
As of 1st December, 2019
(Rs. in million)
|
Particulars
|
Pre-implementation
of Ind AS 116
|
Implementation
adjustments
|
Post-implementation
of Ind AS 116
|
|
Property, Plant and Equipment
|
22,267.1
|
(1,179.0)
|
21,088.1
|
|
Right of use assets
|
–
|
2,326.4
|
2,326.4
|
|
Others
|
48,314.9
|
–
|
48,314.9
|
|
Total assets
|
70,582.0
|
1,147.4
|
71,729.4
|
|
Other equity
|
18,358.4
|
(133.9)
|
18,224.5
|
|
Others
|
964.2
|
–
|
964.2
|
|
Total equity
|
19,322.6
|
(133.9)
|
19,188.7
|
|
Non-current lease liabilities
|
–
|
896.0
|
896.0
|
|
Current lease liabilities
|
–
|
462.0
|
462.0
|
|
Deferred tax liabilities
|
179.5
|
(45.1)
|
134.4
|
|
Trade payables
|
14,946.9
|
(31.6)
|
14,915.3
|
|
Others
|
36,133.0
|
–
|
36,133.0
|
|
Total equity and liabilities
|
70,582.0
|
1,147.4
|
71,729.4
|
(i) The cumulative impact of application of the standard net of deferred taxes has been adjusted through opening equity (1st January, 2019) and previous year’s equity has been restated. Reconciliation of equity as previously reported versus the restated equity is as under:
|
Particulars
|
As
at 31st December, 2019
|
As
at 1st January, 2019
|
|
Equity reported in accordance with Ind AS 17
|
19,322.6
|
36,737.4
|
|
a) Recognition of ROU assets
|
1,147.4
|
1,237.3
|
|
b) Recognition of short-term and long-term lease liabilities
|
(1,326.4)
|
(1,401.3)
|
|
c) Deferred tax impact
|
45.1
|
41.2
|
|
Restated equity in accordance with Ind AS 116
|
19,188.7
|
36,614.6
|
(ii) Reconciliation of profit reported for 2019 to restated profit after adoption of Ind AS 116 ‘Leases’ is as under:
|
Particulars
|
Pre-implementation
of
Ind AS 116
|
Implementation
adjustments
|
Post-implementation
of Ind AS 116
|
|
Revenue of operations
|
123,689.0
|
–
|
123,689.0
|
|
Total income
|
126,157.8
|
–
|
126,157.8
|
|
Finance costs (including interest cost on
employee benefit plans)
|
1,198.3
|
92.9
|
1,291.2
|
|
Depreciation and amortisation
|
3,163.6
|
537.9
|
3,701.5
|
|
Employee benefit expenses
|
12,629.5
|
(47.8)
|
12,581.7
|
|
Other expenses
|
29,545.4
|
(568.0)
|
28,977.4
|
|
Others
|
52,871.1
|
–
|
52,871.1
|
|
Total expenses
|
99,407.9
|
15.0
|
99,422.9
|
|
Profit before tax
|
26,749.9
|
(15.0)
|
26,734.9
|
|
Tax expenses
|
7,054.4
|
(3.9)
|
7,050.5
|
|
Profit after tax
|
19,695.5
|
(11.1)
|
19,684.4
|
|
Other comprehensive income
|
(1,547.7)
|
–
|
(1,547.7)
|
|
Total comprehensive income
|
18,147.8
|
(11.1)
|
18,136.7
|
|
Profit from operations
|
25,862.5
|
77.9
|
25,940.4
|
(iii) Effect on the statement of cash flows for the year ended 31st December, 2019 is as under:
|
Particulars
|
Pre-implementation
of Ind AS 116
|
Implementation
adjustments
|
Post-implementation
of Ind AS 116
|
|
Profit before tax
|
26,749.9
|
(15.0)
|
26,734.9
|
|
Depreciation & amortisation
|
3,163.6
|
537.9
|
3,701.5
|
|
Interest on lease liabilities
|
–
|
92.9
|
92.9
|
|
Others
|
(7,576.8)
|
–
|
(7,576.8)
|
|
Net cash generated from operating activities
|
22,336.7
|
615.8
|
22,952.5
|
|
Net cash generated from investing activities
|
829.9
|
–
|
829.9
|
|
Interest on lease liabilities
|
–
|
(92.9)
|
(92.9)
|
|
Principal payment on lease liabilities
|
–
|
(522.9)
|
(522.9)
|
|
Others
|
(35,399.5)
|
–
|
(35,399.5)
|
|
Net cash used in financing activities
|
(35,399.5)
|
(615.8)
|
(36,015.3)
|
|
Net decrease in cash and cash equivalents
|
12,232.9
|
–
|
12,232.9
|
|
Total cash and cash equivalents at the
beginning of the year
|
35,239.0
|
–
|
35,239.0
|
|
Total cash and cash equivalents at the end of
the year
|
23,006.1
|
–
|
23,006.1
|
(iv) Impact of restatement on earnings per share (EPS) for the year ended 31st December, 2019 is not significant.
