2. (what if 50% is being claimed as a tax deduction?). Land on Perpetual Lease is more of PPE in nature than Leasehold assets. Accounting of Operating Lease in the Books of Lessor: A. Thank you…. 5. The corporate affairs ministry has amended various Indian Accounting Standards 1, 8, 103, 107, 109 and 116.Ind-AS is converged with the International Financial Reporting Standards (IFRS). 2. ♠ The accounting by lessors will not significantly change. The standard leads to more asset and liabilities being put on the lessee’s balance sheet. If a lessee does not present right-of-use assets separately in the balance sheet, the lessee shall include right-of-use assets within the same line item as that within which the corresponding underlying assets would be presented if they were owned and disclose which line items in the balance sheet include those right-of-use assets. A lessee is required to recognize a right-of-use asset representing its right to use the underlying leased asset and a lease liability representing its obligation to make lease payments. Join our newsletter to stay updated on Taxation and Corporate Law. from second year. Copyright © TaxGuru. IND AS 116 Overview Effective date – 1st April 2019 Eliminates the accounting difference between an operating lease and an finance lease for lessee Lessee’s with operating leases will have a major impact in accounting For lessor the accounting and classification is done based on existing operating/finance lease model Ind AS 116, Leases, replaces the existing standard Ind AS 17, Leases, and interpretation/ guidance contained in its appendices. b) what will be the amount of Lease liability (when there is no future liability towards lease rent) 4. The lessor still has to classify leases as either finance or operating, depending on whether substantially all of the risk and rewards incidental to ownership of the underlying asset have been transferred. Indian Accounting Standards. Ind AS session; Impact of De-monetisation; Impact of Ind AS 116 . Lessee may choose not to apply transition provision to short-term leases and leases for which the underlying asset is of low value. No monthly/annual lease rent payable by entity for balance lease period Join our newsletter to stay updated on Taxation and Corporate Law. Existing Leasehold land and it’s depreciation fund will now be replaced with ROU which will be amortised over remaining lease term. Ind AS 116 contains specific provision for lease, Entities are not required to reassess existing lease contracts but can elect to apply the guidance regarding the definition of a lease only to contracts entered into (or changed) on or after the date of initial, Lessee can elect to apply the simplified approach and not restate the comparative information. Practical expedient is given in Ind AS 116 for Lease identification under which an entity is not required to reassess whether a contract is, or contains, a lease at the date of initial application. All lease transactions are covered under Ind AS 116 except for certain prescribed arrangements. This standard applies to a contract that contains lease. Under the full retrospective transition approach, Lessees are required to apply this standard retrospectively to each prior reporting period presented. Under Modified retrospective approach, the lessee shall recognise a lease liability on initial application (i.e. 4. c) If Entity recognizes ROU and Lease liability, what will be the treatment to existing Land assets and it’s accumulated depreciation already reflecting in books. THANKS FOR THE INFORMATION. The new standard on leases, Ind AS 116, Leases is effective for companies from 1 April 2019. Ind AS 116 Leases Following is the Exposure Draft of the Ind AS 116, Leases, issued by the Accounting Standards Board of the Institute of Chartered Accountants of India, for comments. Right to control the use of an identified asset can be assessed by considering whether the customer has both of the following throughout the period of use: An entity shall reassess whether a contract is, or contains, a lease only if the terms and conditions of the contract are changed. Under Finance Lease, lessors derecognize the underlying asset and book profit or loss on such derecognition. The Institute of Chartered Accountants of India (ICAI) is a statutory body established by an Act of Parliament, viz. If that rate cannot be readily determined , the lessee’s incremental borrowing cost. Ind AS 17 required to classify leases as finance lease and operating lease. Accordingly, Ind AS 116 contains scope exceptions for: (a) leases to explore for or use minerals, oil, natural gas and similar non-re-generative resources. ♠ Ind AS 116 defines a lease as 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. Ind AS 116 introduces a single lessee accounting model and requires a lessee to recognize assets and liabilities for all leases with a term of more than 12 months, unless the underlying asset is of low value. A note on Draft Ind AS 116 Leases The Accounting Standard Board has issued an exposure draft on Ind AS 116, Leases, with a proposed effective date of 1st April, 2019, subject to notification by Ministry of Corporate Affairs and Ind AS 116 supersedes Ind AS 17 ‘Leases’. The “State Electricity Co.” is a Govt undertaking which was once part of “State Electricity Board” when it received land from Govt. This article aims at simplifying the concepts of Ind-AS 116 in relation to the classification of leases from the perspective of lessees majorly and compares those requirements to the previous standard (i.e. Users of this publication are encouraged to select disclosures relevant to their 5. Ind AS standalone financial statements will be impacted by Ind AS adoption. Earlier in Old IGAAP we used to deduct TDS under sec 194 I on lease rental paid but now after introduction of Ind AS 116 where the lease rental would now be split into Finance Cost and Repayment of Lease Liability. The new accounting norms have been notified by the corporate affairs ministry. The objective of the new Standard is to ensure that lessees and lessors provide relevant information in a manner that faithfully represents those transactions. As under Ind AS 17, the lessor will continue to classify leases as either finance or operating, depending on whether substantially all of the risks and rewards incidental to ownership of the underlying asset have been transferred. In order to submit a comment to this post, please write this code along with your comment: 6b7178cb6acacc442c2b72ff884a0a0f. : 3 of ITFG Bulletin 21. Against this, Lessor recognises an assets held under a finance lease in their balance sheets and present them as a receivable at an amount equal to the net investment in the lease. There is no monthly/annual lease rent payable by “State Electricity Co.” to State Govt. • Attaching the said Bulletin for your reference. 3. Required fields are marked *, Notice: It seems you have Javascript disabled in your Browser. Ind-AS 17), as the guidance relating to lessor accounting remains largely same as in Ind-AS 17. Monthly Rental for on commercial property: INR 1,00,000/-. In line with this, MCA wide notification dated 30th March, 2019, made Ind AS 116 effective for accounting periods beginning on or after 1 April 2019. If we go with full retrospective approach then in your case, ROU will be created at upfront amount Paid plus initial direct cost incurred in the lease commencement year. Transition – Full Retrospective Approach, D. Balance life of Lease as at 01-04-2019: 3 Years, F. Lessee’s incremental borrowing rate: 8% p.a. 6. D. Lessee’s incremental borrowing rate: 10% p.a. lessee shall adjust the right-of-use asset at the date of initial application by the amount of any provision for onerous leases recognised before the date of initial application. All leases are to be treated in a similar way to finance leases applying Ind AS 17. Ind AS -116 replaces the current guidance in Ind AS-17, ‘Leases’. I have the same query as Mr. Prashant. In the 2019 issue of Wealth Insight, we provided a detailed analysis of the new accounting standard Ind AS 116.It mandates lessees to recognise assets and liabilities for all leases with tenures of over 12 months. (as at April 1, 2019). In this article, you’ll learn about the main changes that Ind AS 116 introduces to the accounting for leases, illustrated on a very simple example. Ind AS 116 requires lessees to disclose ROU either separately in the balance sheet or include the ROU assets in the same line item in which the corresponding underlying assets are presented, if they are owned and disclose which line items in the balance sheet include those ROU assets. Amount of Lease land (paid in 1975) recognized in entity’s books Rs.100 (Asset side) and accumulated amortized cost Rs.40 (Accumulated Dep-liability side) as on 31.03.2019. Ind AS 116/IFRS 16 represents the first major overhaul of lease accounting in over three decades. 1. Right of use asset is recognised and measured at cost, consisting of initial measurement of lease liability plus any lease payments made to the lessor at or before the commencement date less any lease incentives received, initial estimate of the restoration costs and any initial direct costs incurred by the. April 1, 2019) at the present value of the remaining lease payments, discounted using the lessee’s incremental borrowing rate at the date of initial application. What will be the lease term for land lease agreement. Ind-AS 116 Leases Overview Ind AS 116 is notified on March 29, 2019 with applicability for period beginning April 01, 2019 Major changes in the standard are as below - The Chamber of Tax Consultants – IND AS 116 – CA. The upfront payment made to State government by “State Electricity Co.” is not equivalent to market value rather it is much lower than market value. You may read summary of Ind AS 116 Lease as well as Detailed Impact Analyses of Ind AS 116 in … The new standard requires entities to make more judgements and estimates and make more disclosures. No lease liability will be created if there is no liability to pay in future. its carrying amount as if the Standard had been applied since the commencement date, but discounted using the lessee’s incremental borrowing rate at the date of initial application (i.e. Entity has paid upfront premium for Land (total amount as per market value) in the year1975 for 99 years. 4. Operating Lease and Finance Lease. Ind AS 116 contains additional disclosure requirements for lessor as compared to Ind AS 17, such as, disclosure of maturity analysis of lease payments; quantitative and qualitative explanation of significant changes in carrying amount of new investment in finance leases etc. Disclaimer: This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Maintained by V2Technosys.com, Taxguru Consultancy & Online Publication LLP, 509, Swapna Siddhi, Akurli Road, Near Railway Station, Kandivali (East), Smart Investment For Income Earners Through SIP. Brexit 2020-2021: What does it mean to you or me? I referred ITFG Bulletin-21, Issue no-3. It includes a checklist on Ind AS 116, Leases as well as consequential amendments to other Ind AS arising due to its notification. Therefore, GST, whether or not refundable, would not be included in the measurement of the lease liability or right-of-use asset. If the payments for the lease are not at market rates then also an entity is required to measure the sale proceeds at fair value with corresponding adjustment as additional financing by lessor. Based on the details you shared, it seems to be more of a Government Grant in nature instead of Lease Transaction. To achieve this objective, the Standard sets out the principles for the recognition, measurement, presentation and disclosure of leases. 1) Is the tax portion paid in the lease considered an indirect expense or part of the lease payment and need to be amortized over the life of the loan? I will be happy to here you out. Under second modified approach, an entity needs to compute lease liability using discounting rate as at date of initial application and at same value right of use asset is recognised. Ind AS 116/ IFRS 16. Dear sir, If we consider the issue-3 of ITFG 21 with following assumption : The IASB has long considered the existing split between operating and finance leases as problematic as it has resulted in too much structuring and off-balance sheet financing. No monetary threshold has been defined for low-value assets. 1. Hemal Shah. There is no monthly/annual lease rent payable by “State Electricity Co” to “State Govt” for Land. 1. In Statement of cash flows lessee shall classify –. Ind-AS 116 sets out principles for recognition, presentation and disclosure of leases. To recognise a right-of-use asset at the date of initial application, the lessee shall choose, on a lease-by-lease basis, to measure that right-of-use asset at either: Here, the lessee shall not restate comparative information. Page 5 Ind AS 17 Ind AS 116 Assets Liabilities Rights and off-balance sheet items PBT Other expenses Instead, the lessee shall recognise the cumulative effect of initially applying this Standard as an adjustment to the opening balance of retained earnings (or other component of equity, as appropriate) at the date of initial application. Transition – Modified Retrospective Approach (Option I), F. Lessee’s incremental borrowing rate: 10% p.a. 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MCA notifies Ind AS 116 from 01st April 2019; New Leases standard to bring “right to use” assets onto balance sheets of lessees; Lessors’ accounting remaining largely unchanged; Consequent amendments notified to various other Ind AS standards including Ind AS 109 for embedded derivatives in leases and omission of Ind AS 17 Leases. Under this approach, Comparative periods are required to be restated as if Ind AS 116 is applied from the commencement of the lease. The acquirer is required to measure the right of use asset at the same amount at which lease liability created. The key change that has been introduced is the elimination of classification between operating and finance leases, which means that all leases on a lessee’s balance sheet will be recognised. Assets of low value include IT equipment or office furniture. The standard may be applied to a portfolio of leases with similar characteristics, provided that it is reasonably expected that the effects will not differ materially from applying the Standard to the individual leases within that portfolio. Ind AS 116 gives lessees optional exemptions for certain short-term leases and leases of low-value assets. If an entity chooses to apply any one of the exemptions, payments are recognised on a straight-line basis or another systematic basis that is more representative of the pattern of the lessee’s benefit. ♠ Ind AS 116 defines a lease as 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. The effective date of the new Ind AS 116 is 1 April 2019. Live Webcast Topic - Ind AS 116, Leases: A Practical Approach. Instead, the entity is permitted: 2. lessee may apply single discount rate to a portfolio of leases with reasonably similar characteristics. The lease liability is measured in subsequent periods using the interest rate implicit in the lease, if that rate can be readily determined. Difference between 1) Fair value of the asset received below market rate and 2) Actual Consideration Paid shall be considered as Grant. Ind AS 116 Exploration for and Evaluation of Mineral Resources specifies the accounting for rights to explore for and evaluate mineral resources. Please give in nutshell, the disclosures required in transition year as regards lessee. Ind AS 116, Leases - A New Era of Accounting for Lease contracts by Lessees. 5. All Rights Reserved. Ind AS 116 defines a lease as 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. Ind AS 116 requires detailed disclosure for lessees as compared to Ind AS 17. We gave example of a few companies whose balance sheets would get stretched due to … Requirements with regard to lessor accounting are substantially similar to accounting requirements contained in Ind AS 17. A. THE PROVISIONS ARE CLEARLY EXPLAINED, Your email address will not be published. The cumulative effect of applying the standard is recognised as an adjustment to the opening balance of retained earnings at the end of initial. All Rights Reserved. 3. Under Ind AS 17, Lessor is required to classify Leases under two categories viz. Ind-AS 17, Leases. To determine whether a sale has occurred in a sale and leaseback transaction, one need to apply the requirements of Ind AS 115. lessee shall measure the right-of-use asset arising from the leaseback at the proportion of the previous carrying amount of the asset that relates to the right of use retained by the seller lessee and recognizes only the amount of any gain or loss that relates to the rights transferred to the lessor. Any asset or liability created by lessee relating to favourable or unfavourable terms of an operating lease which is subsequently acquired as part of a business combination by an acquirer needs to be derecognised on the date of initial application. Sir, What will be the accounting treatment for Land received by state electricity company for it’s business by state government on lease on 99 years on one-time lump sum payment (not market value) 20-30 years back, will this transaction cover under Ind AS-116! Lease liability is initially recognised and measured at an amount equal to the present value of minimum lease payments during the lease term that are not yet, 2. ♠ Under Ind AS 116 lessees have to recognize a lease liability reflecting future lease payments and a ‘right-of-use asset’ for almost all lease contracts. 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