Changes in LEASE ACCOUNTING - Finance Ppl

**************************************** Calender container- CSS BEGINS *******************************************/ **************************************** Email Subscription- CSS BEGINS *******************************************/ #mc_embed_signup{ .widget iframe, .widget img { max-width: 100%; } #mc_embed_signup{ img { max-width: 100%; vertical-align: middle; border: 0; } #magazine-left { width: 45%; float: left; } #magazine-right { width: 45%; float: right; } } **************************************** Slider Img- CSS BEGINS *******************************************/ **************************************** Scroll- CSS BEGINS *******************************************/ --> /**************************************** HOW NO SIDEBARS-in POST PAGES- CSS BEGINS *******************************************/ /**************************************** SHOW NO SIDEBARS-in CONTACT PAGE- CSS BEGINS *******************************************/ /**************************************** SHOW NO SIDEBARS-in quick run page- CSS BEGINS *******************************************/ /***************************************************** SHOW NO HEADING/TITLE in PROFILE Menu PAGES- CSS BEGINS *****************************************************/ /*************************************************** SERVICES PAGE -CSS BEGINS *****************************************************/ /******************************************** PROFILE PAGE- PADDING - CSS STARTS ****************************************/ /**************************************** SHOW NO SIDEBARS-in INTERVIEW HELPER- CSS BEGINS *******************************************/ /**************************************** SHOW NO SIDEBARS-in ONLINE CLASSES ENROLLMENT FORM- CSS BEGINS *******************************************/ / **************************************** RESOURCES- CSS BEGINS *******************************************/ /*-------TYPOGRAPHY AND SHORTCODES BEGINS--------*/ /*------TYPOGRAPHY AND SHORT CODES ENDS------*/ /******************************************** TEMPLATE SKIN BEGINS ****************************************/ /******************************************** TEMPLATE SKIN ENDS ***************************************************/ /*=============================GOOGLE ANALYTICS JAVA SCRIPT BEGINS==================================*/ //]]> /*=============================GOOGLE ANALYTICS JAVA SCRIPT ENDS==================================*/ /*************************************** HEAD OF THE TEMPLATE BEGINS ******************************************/

Changes in LEASE ACCOUNTING

Accounting in Lessee’s books

Before 2019, Companies followed Ind AS 17, which required lessees to classify leases as either operating leases (kept off the balance sheet & expensed as rent) or finance leases (on-balance sheet- capitalized).

From 2019 onwards, Ind AS 116 replaced Ind AS 17. It introduced a single lessee accounting model. The distinction between operating and finance leases has been eliminated and accounting Shall be as per the new model, which is explained as below:

  1. All leases longer than 12 months (unless the asset is of low value, like a laptop or printer) must be recognized on the balance sheet.

    2. (a) Right-of-use asset (ROU): The lessee records the lease in the balance sheet as “ROU Asset” classified under PPE, representing the right to use the asset over the lease term.

    (b) Liability Recognition: Lease Liability is recognized and disclosed in balance sheet (representing the lease payments/financial due).

    (c) Expense recognition: Depreciation shall be charged on the ROU asset and Interest expense on the lease liability shall be debited to P&L.

  2. Short term leases : Leases with a term of 12 months or less / those for low-value assets can still be kept off the balance sheet and expensed as rentals.
Lessee’s Books - Calculation Flow

As discussed above, the very first step is the present value calculation of lease liability. (which is mandatory step for lessees irrespective of the lease type)

  1. Lease liability

    2. Lease Liability calculation at Initial Measurement is as follows:
    1. Calculate PV of future lease payments.
    - By discounting the payments using either: Built in rate (rate implicit in lease) or borrowing cost.
    Lease Liability = Σ [ Lease Payment / (1 + r)^t ]

    2. Repayment of principal directly reduces the Lease Liability. After each payment, accountant shall re-calculate and shift the next 12 months of principal from "Non-Current" to "Current Liability.

  2. Right-of-Use (ROU) Asset

    Initial Measurement of Right-of-Use (ROU) Asset is at:
    Value that is equal to the lease liability, that is adjusted for the Initial direct costs, Lease incentives received and Prepaid lease payments.

    ROU Asset= Lease Liability + Initial Direct Costs - Incentives + Prepayments

  3. Subsequent measurement

    4. At year-end, the lease liability and ROU Asset are carried at:
    1. Lease Liability: Opening value of lease liability is increased by interest expense and is reduced by repayments.
    2. ROU Asset: ROU Asset is depreciated over lease term (straight-line unless another method better reflects usage).

  4. P&L Impact:

    5. Interest expense (finance cost)
    Depreciation expense (operating cost)

Accounting in Lessor's books

As Far as Lessor’s book is concerned, they shall continue with the dual model, which is

  1. Finance lease: Transfer substantially all risks/rewards, derecognize the Asset from books and recognize the lease receivable at an amount equal to net investment in lease. Lease payments received are split into two parts: reduction of the principal receivable and finance income (interest).
  2. Operating lease: Record and recognise the asset in books and depreciate it. Initial direct costs are often added to the carrying amount of the asset and recognized over the lease term. Recognize rental income in P&L
Lessor’s Books - Calculation Flow

Under Ind AS 116, as far as lessor book is concerned, there is difference in treatment between finance lease and operating lease. Hence, they shall continue with the dual model

Finance lease: Recognize receivable alone and de-recognise the asset from book.

Operating lease: Continue recognizing the asset on books, charge depreciation and recognize the rental income from lease.

Lease Receivable

  1. Initial Measurement on Day 1 (Commencement):

    2. Lease Receivable = PV of all future lease payments + PV of guaranteed residual value.

    we do not recalculate the present value every year. Instead, the opening balance is carried forward and adjusted.

  2. Subsequent Measurement: Each Year:

    3. 1. Opening Balance = Closing Balance from prior year.
    2. Add Interest Income = Opening Balance × Discount Rate.
    3. Subtract Lease Payment (cash inflow).
    4. Closing Balance = Opening Balance + Interest – Payment.
    This continues until the receivable balance reaches zero at the end of the lease term.

  3. P&L Impact: Interest income over lease term.

Operating Lease- Calculation Flow

No PV calculation for recognition.
The Asset remains on balance sheet, depreciated normally, with Lease income recognized on straight-line or systematic basis in P&L.
Additionally, Ind AS 116 requires disclosure of undiscounted lease payments receivable, but many entities also present Present value for comparability.

P&L Impact: Rental income, Depreciation expense