Ind AS 116 explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
Ind AS 116 introduced a single lessee accounting model: lessees recognise a right-of-use asset and a lease liability for almost all leases. It replaced Ind AS 17, ending the operating-lease off-balance-sheet treatment for lessees, while lessor accounting stayed largely the same.
Overview
Ind AS 116, Leases, notified under the Companies (Indian Accounting Standards) Rules, 2015, transformed lessee accounting. Under the old standard, operating leases were kept off the balance sheet with a simple rental expense. Ind AS 116 recognises the economic reality that a lease creates both a right to use an asset and an obligation to pay, and puts both on the balance sheet.
Scope and the Lease Definition
A contract is, or contains, a lease if it conveys the right to control the use of an identified asset for a period in exchange for consideration. Control requires the right to obtain substantially all the economic benefits and to direct the use of the asset. The standard applies to all leases except those specifically excluded, such as leases to explore for minerals and licences of intellectual property under Ind AS 115.
Lessee Recognition and Measurement
At commencement, the lessee recognises a lease liability at the present value of unpaid lease payments and a right-of-use (ROU) asset at that liability plus initial direct costs, prepayments and estimated dismantling costs. Subsequently, the ROU asset is depreciated and the liability accretes interest, reduced by payments.
| Item | Initial measurement | Subsequent |
|---|---|---|
| Lease liability | PV of lease payments | Interest accretion less payments |
| ROU asset | Liability + direct costs + restoration | Depreciation and impairment |
Worked Example
A company leases office space for 5 years at ₹5,00,000 per year, payable in arrears, with an incremental borrowing rate of 8%. The lease liability is the present value of the payments — approximately ₹19,96,000. The ROU asset is recognised at the same amount and depreciated at about ₹3,99,000 per year. In year 1, interest of roughly ₹1,60,000 (₹19,96,000 × 8%) is charged, and the liability reduces by the balance of the ₹5,00,000 payment. Total year-1 expense (₹3,99,000 + ₹1,60,000 = ₹5,59,000) exceeds the old straight-line ₹5,00,000, illustrating front-loading.
Exemptions and Lessor Accounting
Lessees may elect to expense short-term leases (12 months or less) and leases of low-value assets straight-line, avoiding balance-sheet recognition. Lessor accounting is broadly unchanged: lessors continue to classify leases as finance or operating and account for them as before, so the asymmetry between lessee and lessor persists.
Presentation, Disclosure and Impact
The ROU asset and lease liability are presented separately or disclosed in the notes. Disclosures include the depreciation charge, interest on lease liabilities, and a maturity analysis of the liability. The standard raises reported assets and liabilities, improves EBITDA (rent replaced by depreciation and interest), and affects gearing ratios — a key point for entities with large lease portfolios such as retail and aviation.