CA Final · Financial Reporting

Ind AS 116 Leases: formula sheet

Full chapter guide

Key formulas

Definition of a lease: Lease = contract, or part of a contract, conveying the right to control the use of an identified asset for a period of time in exchange for consideration; Assess at inception of the contract. The assessment is reassessed only if the terms and conditions of the contract are changed.
Control of use (both needed): Right to obtain substantially all economic benefits + Right to direct the use = Control; Both must be held throughout the period of use. If use decisions are predetermined, the right to direct use is still met when the customer operates the asset or designed it so as to predetermine its use. So a lack of decision rights alone does not rule out a lease.
Substantive substitution right: Practical ability to substitute throughout the period + Supplier benefits economically from substitution = Substantive right; If substantive, there is no identified asset and no lease. Substitution only on repair or malfunction is not substantive. Assessed at inception and not reassessed afterwards.
Allocation to lessee's lease components: Price allocated to a lease component = Contract consideration × (Relative stand-alone price of the lease component ÷ Sum of stand-alone prices of all components); Stand-alone price is the price a supplier would charge separately. Use observable prices where available, otherwise estimate maximising observable information.
Practical expedient for lessee: Election by class of underlying asset: do not separate non-lease components; account for lease plus non-lease as one lease component; The fixed non-lease payments are then included in the lease liability, while variable payments are assessed on their own terms. Not available to lessors.
Lease term: Non-cancellable period + extension periods (if reasonably certain to exercise) + periods after a termination option (if reasonably certain not to exercise); Assess at commencement. Reassess on a significant event or significant change in circumstances within the lessee's control that affects reasonable certainty. Also revise the term when an option is exercised, or not exercised, contrary to the earlier assessment.
Short-term lease test: Lease term ≤ 12 months at commencement AND no purchase option; Elected by class of underlying asset. Any change in term or a modification means the lease is treated as a new lease.
Low-value test: Value of the underlying asset when new is low; Judged on the asset itself, not on the lessee's size. Elected lease by lease. Not available if the asset depends on or is highly interrelated with other assets.
Lease payments included in the liability: Fixed payments (including in-substance fixed) – lease incentives receivable + index/rate-linked variable payments (at commencement index) + expected residual value guarantee payments + purchase option price (if reasonably certain) + termination penalties (if the term reflects termination); Other variable payments, such as sales-based rent, are left out and expensed when incurred.
Initial lease liability: Σ [Lease payment ÷ (1 + r)ⁿ] for unpaid payments; r is the implicit rate if readily determinable, otherwise the IBR. For payments in advance, the first payment at commencement has n = 0.
Initial ROU asset: Lease liability + payments at or before commencement – incentives received + initial direct costs + estimated restoration costs; Restoration costs are included to the extent the lessee incurs the obligation at commencement or as a consequence of using the asset during the period, and not where incurred to produce inventories. They are recognised as a provision under Ind AS 37.
Subsequent liability: Closing liability = Opening liability + Interest (opening × r) – Payments; Interest goes to the P&L as a finance cost, unless capitalised under Ind AS 23.
Depreciation of ROU asset: (Cost – residual value) ÷ shorter of lease term and useful life; if ownership transfers or a purchase option is reasonably certain, use the useful life; Depreciation starts at commencement date.
Separate lease test (lessee and lessor): Separate lease = increase in scope (right to use additional asset) AND increase in consideration commensurate with standalone price; Both conditions must be met. An extension of term alone or a rent change alone is not a separate lease.
Remeasurement on modification (not a separate lease): Revised lease liability = PV of revised lease payments over revised lease term at revised discount rate; Use the rate implicit in the lease for the remainder of the term if it can be readily determined. Otherwise use the lessee's incremental borrowing rate at the effective date of the modification.
Decrease in scope: Reduce ROU asset in proportion to the decrease; gain or loss = reduction in lease liability − reduction in ROU asset; Recognise in profit or loss. For other modifications, adjust the ROU asset by the remeasurement of the liability.
Reassessment with unchanged discount rate: Remeasure liability using the original (unchanged) discount rate; Applies to a change in amounts expected under a residual value guarantee, and to a change in future payments from an index or rate. Exception: if the change is in a floating interest rate, use a revised rate.
Reassessment with revised discount rate: Remeasure liability using a revised discount rate; Applies to a change in lease term and to a change in the assessment of a purchase option. Rate is the implicit rate for the remainder of the term if readily determinable, else the incremental borrowing rate at the reassessment date.
Adjustment of ROU asset after reassessment: Dr/Cr ROU asset by the amount of remeasurement of the lease liability; If the ROU asset is already reduced to zero and the liability falls further, recognise the remaining amount in profit or loss.
Lessor: finance lease modification: Separate lease if the two conditions are met; else, if the lease would have been operating had the modification existed at inception, treat as a new operating lease from the effective date; otherwise apply Ind AS 109; In the middle case, the net investment in the lease just before the effective date becomes the carrying amount of the underlying asset.
Lessor: operating lease modification: Treat as a new lease from the effective date; Prepaid or accrued lease payments relating to the original lease are treated as part of the payments for the new lease.
Classification test: Finance lease if substantially all risks and rewards of ownership are transferred; otherwise operating lease; Judged at inception and on substance. Classify by looking at the whole arrangement, not one indicator.
Situations that individually or combined normally indicate a finance lease: Ownership transfers at end of term | Purchase option reasonably certain to be exercised | Lease term covers major part of economic life | PV of lease payments amounts to at least substantially all of the asset's fair value | Specialised asset only the lessee can use without major modification; Further indicators: lessee bears lessor's cancellation losses, gains or losses from fair value changes in residual go to lessee, lessee can renew at a substantially below-market rent.
Gross investment in the lease: Gross investment = Lease payments receivable by lessor + Unguaranteed residual value accruing to lessor; Lease payments include fixed payments, index or rate-based variable payments, exercise price of a reasonably certain purchase option, termination penalties if the term reflects it, and residual value guarantees from the lessee.
Net investment in the lease: Net investment = Present value of gross investment at the interest rate implicit in the lease; The implicit rate makes PV of lease payments plus unguaranteed residual equal fair value of the asset plus lessor's initial direct costs.
Finance income: Finance income for period = Opening net investment × implicit rate; Recognise over the lease term on a pattern reflecting a constant periodic rate of return on net investment.
Closing net investment (payments at end of period): Closing = Opening + Finance income − Lease payment received; Use this when the payment is received at the end of the period, as in the arrears example below.
Closing net investment (payments in advance): Closing = (Opening − Payment at start) × (1 + implicit rate); Deduct the receipt at the start of the period first, then compute interest on the reduced balance. Finance income = (Opening − Payment) × rate.
Operating lease income: Annual income = Total lease payments over lease term ÷ Lease term in years (straight-line); Use another systematic basis only if it better represents the pattern of benefit from the asset. Depreciation of the leased asset is a separate expense.
Right-of-use asset (sale case): ROU asset = Carrying amount of asset × (PV of lease payments ÷ Fair value of asset); Use the lease liability measured at market-based payments. The ratio shows the share of the asset the seller-lessee retains.
Total gain or loss on sale: Total gain = Fair value of asset − Carrying amount; If the price equals fair value, this is the same as price minus carrying amount.
Gain recognised by seller-lessee: Gain recognised = Total gain × (1 − PV of lease payments ÷ Fair value); Only the gain on rights transferred to the buyer-lessor is recognised. The balance is absorbed in the lower ROU asset.
Sale price above fair value: Excess of price over fair value = Additional financing (financial liability for seller-lessee); The buyer-lessor records the excess as a financial asset under Ind AS 109.
Sale price below fair value: Shortfall of price below fair value = Prepayment of lease payments; Add it to the ROU asset by treating the shortfall as a prepaid lease payment. Adjust the more readily determinable of the price difference or the lease-payment difference.
Not a sale (Ind AS 115 test fails): Seller-lessee: keep asset, financial liability = proceeds. Buyer-lessor: financial asset = amount paid; Both apply Ind AS 109 to the financial item.
Lease liability at DIA (modified retrospective): Lease liability = Σ [Remaining lease payment ÷ (1 + r)^t]; r is the lessee's incremental borrowing rate at DIA. Include only payments for the remaining lease term.
ROU asset, option (b): ROU asset = Lease liability + prepaid lease payments − accrued lease payments; Prepaid or accrued amounts are those recognised in the balance sheet immediately before DIA.
ROU asset, option (a): ROU asset = carrying amount as if Ind AS 116 had been applied since commencement date, but discounted using the lessee's incremental borrowing rate at DIA; Chosen lease by lease. This can create a retained earnings adjustment.
Previously finance leases (lessee, modified retrospective approach): ROU asset and lease liability at DIA = Ind AS 17 carrying amounts immediately before DIA; Applies when the modified retrospective approach is used. No remeasurement and no retained earnings adjustment at transition. Not used under full retrospective application.
Effective date: Annual periods beginning on or after 1 April 2019; DIA is the start of the annual period of first application.
Subsequent lease liability: Closing liability = Opening + Interest at r − Payments; Interest goes to finance costs; ROU depreciation is shown separately.

Quick revision

A lease conveys the right to control the use of an identified asset for a period in exchange for consideration.
No identified asset exists if the supplier has a substantive right to substitute it throughout the period of use.
The lessee recognises a right-of-use asset and a lease liability at the commencement date.
Lease liability = present value of unpaid lease payments, discounted at the rate implicit in the lease, or else the lessee's incremental borrowing rate.
Right-of-use asset = lease liability (present value of payments not yet paid at commencement) + lease payments made at or before commencement (less any lease incentives received) + initial direct costs + estimated costs of dismantling and restoring, as an obligation under the lease (Ind AS 37).
Lease term covers the non-cancellable period plus optional periods the lessee is reasonably certain to exercise.
A short-term lease is one with a term of 12 months or less at commencement and no purchase option. Short-term leases and low-value asset leases may be expensed on a straight-line basis or another systematic basis that is more representative of the pattern of the lessee's benefit, if the lessee elects the exemption. The short-term election is made by class of underlying asset. The low-value election is made lease by lease. Low value is judged on the asset's value when new. The low-value exemption does not apply if the lessee subleases the asset or expects to sublease it.
Interest on the liability uses the effective interest method. Depreciate the right-of-use asset over the shorter of its useful life and the lease term, unless ownership transfers or a purchase option is reasonably certain to be exercised, in which case depreciate over the useful life.
A lessor classifies a lease as finance if it transfers substantially all risks and rewards of ownership, otherwise operating.
In a finance lease the lessor derecognises the asset and records a net investment in the lease; in an operating lease it keeps the asset and recognises income on a straight-line basis.
In sale and leaseback, first test whether the transfer is a sale under Ind AS 115. If it is not a sale, the seller-lessee keeps the asset and records a financial liability equal to the transfer proceeds, and the buyer-lessor records a financial asset equal to the proceeds. If it is a sale, the seller-lessee measures the right-of-use asset at the proportion of the previous carrying amount that relates to the right of use retained, and recognises only the gain or loss relating to the rights transferred.
Variable payments linked to an index or rate are included in the liability; other variable payments are expensed when incurred.

Common mistakes

Treating a contract as a lease because it is titled 'lease agreement', or as a service because it is titled 'service agreement'. Fix: Apply the substance test: identified asset plus right to control use. Say that the title is not decisive.
Ignoring the supplier's substitution right when the asset is named in the contract. Fix: Always test substitution. A named asset is not identified if the supplier has a substantive right to substitute it throughout the period.
Using the non-cancellable period as the lease term even when a renewal option is reasonably certain to be exercised. Fix: Always list the economic incentives in the case. If the facts make renewal reasonably certain, include the renewal period in the lease term and in the payments.
Treating a 9-month lease with a purchase option as a short-term lease. Fix: Short-term means 12 months or less and no purchase option. Check both conditions.
Treating every extension of term as a separate lease. Fix: A separate lease needs added right to use an asset plus commensurate price. A pure term extension fails the first test, so remeasure the existing liability.
Using the original discount rate when the lease term changes or a modification is not a separate lease. Fix: Use a revised rate at the effective date or reassessment date for modifications and for term or purchase option changes. Keep the old rate only for index, rate and guarantee changes.
Classifying a lease as finance only because the lease term is long or the contract says so. Fix: Weigh all indicators and the substance. Ind AS 116 asks about transfer of substantially all risks and rewards, not about a single threshold.
Applying the lessee's right-of-use and lease liability model to the lessor. Fix: The lessor has no right-of-use asset. It either shows a lease receivable (finance) or keeps the underlying asset (operating).
Booking the whole gain (sale price − carrying amount) in profit or loss. Fix: Recognise only the gain on rights transferred. Total gain × (1 − PV of lease payments ÷ fair value).
Measuring the ROU asset at the lease liability or at fair value. Fix: In a sale and leaseback, ROU = old carrying amount × retained proportion.

Exam tips

Write the answer in provision, facts, conclusion form: cite the test, apply the facts, then state lease or no lease.
In case-scenario MCQs, look for the decisive detail: a substitution right for the supplier's benefit, a non-distinct capacity portion, or predetermined use decisions where the customer operates or designed the asset.
When asked about separation, show the relative stand-alone price working and a total check. Mention the lessee expedient and that it is by class of asset.
Always check scope exclusions in definition questions. Mineral rights, Ind AS 41 biological assets, service concession arrangements and Ind AS 115 IP licences sit outside Ind AS 116.
State that the assessment is made at inception and reassessed only if the contract terms change.
Case scenario questions hide the lease term in the facts: fit-outs, below-market renewal rent, penalties, critical assets. Quote the fact and the conclusion in your answer, in the form provision, facts, conclusion.
Always check both conditions for the short-term exemption. A purchase option is the usual trap in MCQs.
In numerical questions show the schedule, even when only one year's figure is asked. It earns working marks and shows the closing balance reconciles to nil.