KEY DIFFERENCES BETWEEN IND AS 116 AND CURRENT IND AS

Definition of a lease

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.

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.

Recognition exemptions

Short term leases-lessees

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

Not applicable

Leases of low value assets- lessees

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).

Not applicable

Classification

Lease classification-lessees

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.

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.

Measurement

Lease payments included in the initial measurement-lessees

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

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.

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

No assets and liabilities are recognised for the initial measurement of operating leases.

Reassessment of lease liability-lessees

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

Not dealt with by current Ind AS

Lease modifications

Lease modifications to an operating lease-lessors

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.

Not dealt with by current Ind AS

Lease modifications which do not result in new separate leases-lessees and lessors

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.

Not dealt with by current Ind AS

Presentation and disclosure

Presentation-lessees

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.

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

Disclosure-lessees and lessors

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.

Quantitative and qualitative disclosures are required, but generally fewer disclosures are required than under Ind AS 116.

Sale and leaseback transactions

Sale and leaseback transactions determining whether a sale has occurred

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.

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.

Sale and leaseback transactions accounting by seller-lessees

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.

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.

Sale and leaseback transactions-accounting by seller-lessees for transactions not at fair value

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.

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

Business  Combinations

Business combinations – acquiree is a lessee – initial measurement

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.

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.