Ind AS · Key standards
How does a tenant account for a lease under Ind AS 116?
Short answer
A tenant (lessee) recognises almost every lease on the balance sheet: a lease liability at the present value of the unpaid lease payments, and a right-of-use asset of the same amount plus advance payments and initial direct costs. Rent expense is replaced by depreciation and interest, which front-loads the cost. Leases of 12 months or less and leases of low-value assets can be expensed instead.
Is it a lease?
A contract is a lease if it conveys the right to control the use of an identified asset for a period in exchange for payment. Office and shop premises, warehouses, vehicles and equipment usually qualify, including "leave and licence" arrangements, whatever the agreement is called.
At the start of the lease
- Lease term: the non-cancellable period, plus extension periods you are reasonably certain to use, and termination periods you are reasonably certain not to use.
- Lease liability: present value of the unpaid fixed payments (and payments linked to an index or rate), discounted at the rate implicit in the lease or, usually, your incremental borrowing rate.
- Right-of-use asset: the lease liability, plus payments made at or before commencement, initial direct costs and estimated restoration costs, less lease incentives received.
Each year after
| Item | Treatment |
|---|---|
| Right-of-use asset | Depreciated, usually straight-line over the lease term |
| Lease liability | Interest added at the discount rate; payments reduce it |
| Profit and loss | Depreciation plus interest, higher in early years than the old straight-line rent |
| EBITDA | Higher, because rent is no longer an operating expense |
| Cash flow | Principal in financing activities; interest as per your policy |
| Security deposit | Discounted to present value; the difference is part of the right-of-use asset |
Exemptions
You may choose to expense payments on a straight-line basis for short-term leases (12 months or less, with no purchase option) and leases of low-value assets (such as laptops or small office furniture). Variable rent not linked to an index, such as a share of sales, is expensed as incurred.
Changes during the lease
Rent escalations fixed in the agreement are included from the start. A change in the term, or a renegotiation, means the liability is remeasured with a revised discount rate, and the right-of-use asset adjusted.
Tax: the Income-tax Act still allows the rent paid, so a deferred tax difference arises. Try your own figures in the Ind AS 116 lease calculator.
Legal basis
- Ind AS 116, Leases
- Companies (Indian Accounting Standards) Rules, 2015
Official sources
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