Accounting for lease
The Companies (Indian Accounting Standards) Amendment Rules of 2023 have introduced crucial updates to the accounting regulations concerning leases in India. These alterations are shaped by two main standards - IndAS 116 (Leases) and IFRS 16 (Leases) - which supersede the previous IAS 17.
The rules, in their essence, detail the objectives, scope, and recognition prerequisites for leases. They also lay out instructions to recognize leases, and demonstrate the treatment of leases from the perspectives of both lessors and lessees. Additionally, the rules acknowledge temporary exceptions stemming from the interest rate benchmark reform and concessions in rents due to the Covid-19 pandemic. As these changes require retrospective application, they are likely to affect the financial statements of entities.
These are the primary standards relevant to Accounting for leases:
IndAS 116-Leases: Inserted by the Companies (Accounting Standards) Amendment Rules 2019 effective from 1/4/2019.
IFRS 16, Leases: Corresponding International Financial Reporting Standard issued by IASB.
IFRS 16 replaced IAS 17 as of 1 January 2019, with early application allowed.
AS 19 Leases: This governs the arrangement between lessor and lessee, wherein the lessor grants the lessee the right to use an asset for a specified period of time in return for lease rent.
Under the provisions of Ind AS 116-Leases, the following are detailed:
I. Objective: To establish the principles for recognition, measurement, presentation, and disclosure of leases.
II. Scope: This standard should be applied to all leases, including leases of right-of-use assets in a sublease, except for certain exceptions, such as leases to explore or use natural resources, leases of biological assets, service concession arrangements, licenses of intellectual property, and rights held by a lessee under licensing agreements.
III. Identifying a lease: At the start of a contract, an entity must assess whether the contract constitutes or contains a lease.
IV. Lessee: A lessee should treat almost all leases, except those for short-term and low-value assets, as finance leases. There is no classification such as Finance lease, Operating lease from the lessee's point of view.
V. Recognition: At the start of the lease, a lessee should recognize a right-of-use asset and a lease liability. These should be measured at cost, which includes the initial measurement of the lessee liability, any lease payments made at or before the commencement date, any initial direct costs incurred by the lessee, and an estimate of costs to be incurred by the lessee in dismantling and removing the underlying asset and restoring the site.
VI. Subsequent measurement of lease Asset: The right-of-use asset can be measured using a cost model or a revaluation model.
VII. Subsequent measurement of lease liability: The lessee shall adjust the lease liability for interest on the lease liability, lease payments, and lease modifications.
IX. Presentation in financial statements: The right-of-use asset and lease liability are presented in the balance sheet, while interest and depreciation are presented in the profit and loss statement.
X. Lessor: A lessor classifies each of its leases as either an operating lease or a finance lease. In the case of finance leases, a lessor recognizes assets held under a finance lease in its balance sheet and presents them as a receivable at an amount equal to the net investment in the lease. For operating leases, a lessor recognizes lease payments from operating leases as income on a straight-line basis or another systematic basis.