1. Indian Accounting Standard (Ind AS) 17 – Leases Exposure Draft on Leases – IndAS 116
By Veena Hingarh

2. Scope of this Standard
This Standard shall be applied in accounting for all leases other than:
leases to explore for or use minerals, oil, natural gas and similar nonregenerative resources; and
licensing agreements for such items as motion picture films, video recordings, plays, manuscripts, patents and copyrights.

3. Scope of this Standard
This Standard shall not be applied as the basis of measurement for:
(a) property held by lessees that is accounted for as investment property (Ind AS 40)
(b) investment property provided by lessors under operating leases (Ind AS 40)
(c) biological assets within the scope of Ind AS 41 Agriculture

4. Understanding Core Terms
Lease (Ind AS 17)
An agreement whereby the lessor conveys to the lessee in return for payment the right to use an asset for an agreed period of time.

5. Understanding Core Terms
Lease under Ind AS 116
A contract, or part of a contract, that conveys the right to use an asset (the underlying asset) for a period of time in exchange for consideration.

6. Determining whether an arrangement contains a lease
When does a lease exist?
Fulfilment of the arrangement is dependent on the use of a specific asset
The arrangement conveys the right to use the asset

7. Determining whether an arrangement contains a lease
Use of specific asset
A specific asset is identified either explicitly or implicitly in an arrangement.
It is not economically feasible or practical for the supplier to use alternative assets
The supplier only owns one suitable asset for the performance of the obligation
The asset used needs to be at a particular location or is specialised
The supplier is a special purpose entity formed for a limited purpose

8. Determining whether an arrangement contains a lease
Right to use the specific asset
Identify right to use more than actual use
Purchaser has ability (right) to operate or direct others to operate, obtaining control over more than an insignificant amount of output of asset.
Purchaser has ability (right) to control physical access to the asset
Purchase price is not a fixed market price per unit of output, and it is remote that any third party will take more than an insignificant part of output of the asset.

9. Determining whether an arrangement contains a lease
Reassessment if arrangement contains a lease after inception:
A change is made to the contractual terms, other than renewals and extensions
A renewal option is exercised or an extension is agreed that was not in initial arrangement.
A change is determined on whether fulfilment is dependent on a specified asset
There is a substantial change to the asset.

10. Identifying a Lease Ind AS 116
When does a contract contain a lease
A contract is, or contains a lease if it meets
Fulfilment of the lease depends on the use of an identified asset
The contract conveys the right to control for a period of time in exchange for consideration.
Control
The right to direct the use of the identified asset
The right to obtain substantially all of the economic benefits

11. IndAS 17: Accounting for Lease
Cash flows under arrangement must be separated into component
Right to use the asset,
Service and maintenance agreements,
Right to use - lease under IndAS 17.
Operating Lease
Financial Lease

12. Classification of Leases
Finance lease if it transfers substantially all the risks and rewards incidental to ownership.
Operating lease if it does not transfer substantially all the risks and rewards incidental to ownership.

13. Classification of Leases
Risks include the possibilities of losses
From idle capacity or
Technological obsolescence, and of
Variations in return because of changing economic conditions (including changes in the value of any residual interest).
Rewards represented by
Expectation of profitable operation over the asset’s economic life
Gain from appreciation in value of any residual interest.

14. Classification of Leases
Finance Lease
the lease transfers ownership of the asset to the lessee by the end of the lease term.
the lessee has the option to purchase the asset at a price that is expected to be sufficiently lower than the fair value at the date the option becomes exercisable for it to be reasonably certain, at the inception of the lease, that the option will be exercised.

15. Classification of Leases
Finance Lease
the lease term is for the major part of the economic life of the asset even if title is not transferred.
at the inception of the lease the present value of the minimum lease payments amounts to at least substantially all of the fair value of the leased asset.
the leased assets are of such a specialised nature that only the lessee can use them without major modifications.

16. Classification of Leases
Inception of the lease
is the earlier of the date of the lease agreement and the date of commitment by the parties to the principal provisions of the lease.

17. Classification of Leases
Under IndAs 116
A ‘right-of-use’ model replaces the ‘risks and rewards’ model. Lessees are required to recognise an asset and liability at the inception of a lease.

18. Classification of Leases
‘Substantially all’
Finance lease classification is not appropriate in cases where the lessor retains significant risks and rewards of ownership.
In many cases the same classification (finance lease or operating lease) is appropriate for both the lessee and the lessor. However, in some cases different classifications are appropriate.

19. Classification of Leases
Multiple parties to a lease classification:
‘Tripartite lease agreement whereby the lessor (entity A) transfers substantially all the risks and rewards of ownership to two unrelated parties—the lessee (entity B) obtains the right of use of the leased asset for a specified period and the other party (entity C) contracts to acquire the leased asset from the lessor (entity A) at the end of the lease term at a fixed price.
How do A, B, and C Classify the lease
In this case, the lessor (entity A) and the lessee (entity B) would classify the lease as a finance lease and an operating lease respectively. The third party (entity C) has a firm commitment to acquire the leased asset at the end of the lease term.

20. Classification of Leases
Other situations of finance lease are:
(a) if the lessee can cancel the lease, the lessor’s losses associated with the cancellation are borne by the lessee.
(b) gains or losses from the fluctuation in the residual value of the leased asset accrue to the lessee
(c) the lessee has the ability to continue the lease for a secondary period at a rent that is substantially lower than market rent.

21. IndAS 17: Accounting for Financial Lease
Lessee
Lessor
Balance sheet
Leased asset (include indirect costs)
Liability (PV of minimum lease payments)
Receivable (less indirect costs) (PV of net investment)
Income statement
Depreciation
Finance expense
Profit on sale?
Finance income

22. IndAS 17: Accounting for Operating Lease
Lessee
Lessor
Balance sheet
Lease rental payable
Leased asset
Lease rental receivable
Income statement
Lease rental expense
Depreciation Lease rental income

23. Sale and Leaseback Transactions
A sale and leaseback transaction involves the sale of an asset and the leasing back of the same asset.
The lease payment and the sale price are usually interdependent because they are negotiated as a package.
The accounting treatment of a sale and leaseback transaction depends on the type of lease.

24. Sale and Leaseback Transactions
Finance lease
any excess of sales proceeds over the carrying amount in the books of the lessee (vendor) should be deferred and amortised over the lease term.

25. Sale and Leaseback Transactions
Operating lease
Defer and amortise excess over fair value
Defer and amortise loss
Sale price = FV
Recognise profit or loss immediately
Sale price > FV
Sale price < FV
and, in case of a loss, not compensated by future below-market
lease payments
Sale price < FV and resulting loss is compensated by future below-market lease payments

26. Operating Lease Incentives
Recognised as an integral part of the net consideration
Lessor - aggregate cost of incentives a reduction of rental income over the lease term,
On a straight-line basis unless another systematic basis is representative of the time pattern over which the benefit of the leased asset is diminished.
Examples of such incentives
are an up-front cash payment to the lessee or the reimbursement or assumption by
the lessor of costs of the lessee (such as relocation costs, leasehold improvements
and costs associated with a pre-existing lease commitment of the lessee).
Alternatively, initial periods of the lease term may be agreed to be rent-free or at a
reduced rent.

27. Operating Lease Incentives
Recognised as an integral part of the net consideration
Lessee - aggregate benefit of incentives as a reduction of rental expense over the lease term,
On a straight-line basis unless another systematic basis is representative of the time pattern of the lessee’s benefit from the use of the leased asset.
Examples of such incentives
are an up-front cash payment to the lessee or the reimbursement or assumption by
the lessor of costs of the lessee (such as relocation costs, leasehold improvements
and costs associated with a pre-existing lease commitment of the lessee).
Alternatively, initial periods of the lease term may be agreed to be rent-free or at a
reduced rent.
2 The issue is how incentives in an operating lease should be recognised in the

28. IndAS 116: Lease Effective January 1, 2019
Lease is a contract that conveys the right to use an asset for a period of time in exchange for consideration
Identified asset (explicitly or implicitly)
A right to control the use of the asset for a particular period
Control – ability to direct and derive benefit from use

29. IndAS 116: Lease
The distinction between operating and finance leases is eliminated for lessees
Lease asset (representing the right to use the leased item for the lease term)
Lease liability (representing the obligation to pay rentals)

30. IndAS 116: Lease Lessee Accounting Right-of-use model
A lessee would recognise a right-of-use asset and a lease liability for all leases of more than 12 months.
Asset and the liability are initially measured at the present value of lease payments.
The right-of-use asset also includes any costs incurred that are directly related to entering into the lease.
Short-term leases - Option to exclude leases less than 12 months
Variable lease payments – exclude if linked to sale or use, include if linked to index or a rate
Optional payments – exclude unless significant incentive to exercise option

31. IndAS 116: Lease Lessee Accounting Consumption principal
Two kinds of leases
A lease for which the lessee pays for the part of the underlying asset that it consumes (or uses up) during the lease term
Equipment, vehicles, and other depreciating assets
Lessor prices lease to recover value of the part of the asset consumed and return on its investment in asset.

32. IndAS 116: Lease Dual approach - Consumption principal Type 1: Type 2:
A lease for which the lessee merely pays for use
Land, building and other property
the lessor prices the lease to obtain a return on its investment in the underlying asset
Income Statement Cash Flow Statement
Type 1:
Type 2:
Amortisation, depreciation, Interest
Principal paid
Interest
Single Lease Expense
Total cash paid

33. IndAS 116: Lease Lessor Accounting - Does not change
Continue to reflect the underlying asset subject to the lease arrangement on the balance sheet for leases classified as operating.
For financing arrangements or sales, the balance sheet reflects a lease receivable and the lessor’s residual interest, if any