CMA Final · Corporate Financial Reporting

Leases (Ind AS 116): formula sheet

Full chapter guide

Key formulas

Lease term: Non-cancellable period + extension periods reasonably certain to be used + periods after termination options reasonably certain not to be exercised; Reasonable certainty is a judgement based on economic incentives.
Lease liability at commencement: Σ [Unpaid lease payment ÷ (1 + r)^t]; r is the implicit rate if readily determinable, else the IBR (paragraph 26).
Lease payments included: Fixed (less incentives) + index/rate-linked variable + purchase option price if reasonably certain + termination penalties if the term reflects termination + expected residual value guarantee amounts; Sales-based or usage-based variable payments and non-lease components are excluded.
Interest rate implicit in the lease: PV of (lease payments + unguaranteed residual value) = Fair value of asset + lessor's initial direct costs; Solve for the rate r.
Revised discount rate on remeasurement: Implicit rate for the remainder of the term if readily determinable; else IBR at the reassessment date; Applies to a change in term or purchase option assessment (paragraphs 40-41). For modifications, the date is the effective date (paragraph 45).
Remeasurement with the original rate: Change in residual value guarantee or index/rate-linked payments: remeasure by discounting revised payments; Paragraph 42. The index change is reflected only when the cash flows change.
Lease liability at commencement: Lease liability = Σ [Lease payment ÷ (1 + r)^t]; Discount unpaid payments at the implicit rate, or the incremental borrowing rate if the implicit rate cannot be readily determined.
Initial ROU asset: ROU asset = Lease liability + payments made at or before commencement − lease incentives received + initial direct costs + estimated restoration costs; Only include items that apply to the question.
Interest on lease liability: Interest = Opening liability × r; For payments in advance, the first payment reduces the liability before interest accrues.
Closing lease liability: Closing liability = Opening liability + Interest − Payment; The closing balance after the last payment should be nil.
Depreciation of ROU asset: Depreciation = (ROU asset − residual value) ÷ shorter of lease term and useful life; Use useful life if ownership transfers or a purchase option is reasonably certain to be exercised.
Exemption expense: Expense = Total lease payments ÷ lease term (straight-line); Another systematic basis applies if it is more representative of the pattern of benefit (paragraph 6).
Low-value test: Value of the asset when new, on an absolute basis; Age of the asset and size of the lessee do not matter. Examples: tablets, personal computers, small office furniture, telephones. Cars do not qualify.
Separate lease test (lessee): Separate lease = scope increases (right to use added underlying asset) AND price increase = commensurate with stand-alone price; Both conditions are needed. Appropriate adjustments to the stand-alone price for the contract's circumstances are allowed.
Modification not a separate lease: steps: At effective date: allocate consideration → determine lease term → remeasure liability at revised discount rate; Revised rate is the rate implicit in the lease for the remaining term if readily determinable, otherwise the lessee's incremental borrowing rate at the effective date of the modification.
Decrease in scope: Reduce ROU asset for the partial or full termination; gain or loss to profit or loss; Any other change in the liability then adjusts the ROU asset.
Other modifications: Change in lease liability = corresponding adjustment to ROU asset; Applies to all modifications that are not separate leases and do not decrease scope.
Reassessment: index, rate or residual value guarantee: Remeasure liability by discounting revised lease payments; adjustment goes to ROU asset; Use an unchanged discount rate unless the change comes from floating interest rates, in which case use a revised rate. For an index or rate change, remeasure only when the cash flows actually change.
ROU asset reduced to zero: If ROU = 0 and the liability falls further, the balance goes to profit or loss; Applies to remeasurement adjustments in reassessments.
Lessor, finance lease modification: Separate lease if scope increases at commensurate price; else, if it would have been an operating lease at inception, treat as new lease with carrying amount = net investment; otherwise apply Ind AS 109; Lease classification is reassessed only on a modification.
Net investment in the lease: Net investment = PV of lease payments receivable + PV of unguaranteed residual value (at the rate implicit in the lease); Gross investment less unearned finance income equals net investment.
Unearned finance income: Unearned finance income = Gross investment − Net investment; Gross investment = lease payments receivable by the lessor + unguaranteed residual value.
Finance income for a period: Finance income = Opening net investment × Implicit rate; Receipts reduce both principal and unearned finance income. Closing net investment = Opening + Finance income − Receipt.
Dealer lessor: revenue: Revenue = Lower of (fair value of asset, PV of lease payments accruing to lessor at a market rate); Per paragraph 71(a).
Dealer lessor: cost of sale: Cost of sale = Cost (or carrying amount) of asset − PV of unguaranteed residual value; Per paragraph 71(b).
Dealer lessor: selling profit: Selling profit = Revenue − Cost of sale; Recognised at commencement. If the quoted rate is artificially low, restrict profit to that under a market rate (paragraph 73).
Selling costs of dealer lessor: Costs of obtaining a finance lease are expensed at commencement; Paragraph 74. They are excluded from initial direct costs and from net investment.
Not a sale: Seller-lessee: keep asset + financial liability = proceeds. Buyer-lessor: financial asset = proceeds; Both parties then apply Ind AS 109.
Above-market price adjustment: Additional financing = Sale price − Fair value; Treated as a loan from buyer-lessor to seller-lessee.
Below-market price adjustment: Prepayment of lease payments = Fair value − Sale price; Below-market terms are accounted for as a prepayment of lease payments (para 101(a)).
Right-of-use asset: ROU = Carrying amount × PV of lease payments for the lease ÷ Fair value; Use PV of lease payments after removing any financing element.
Total gain: Gain = Fair value − Carrying amount; Only part is recognised.
Gain recognised: Gain recognised = Gain × (Fair value − PV of lease payments) ÷ Fair value; This is the gain on rights transferred to the buyer-lessor.
Lease liability: Lease liability = PV of lease payments (excluding financing portion); Discount at the rate implicit in the lease, or else the incremental borrowing rate.
Lessee balance sheet (para 47): Right-of-use assets and lease liabilities: present separately OR disclose in notes; If not separate, ROU assets sit in the line item of the equivalent owned asset, and you disclose which line items hold ROU assets and lease liabilities.
Lessee profit and loss (para 49): Depreciation on ROU asset and interest on lease liability shown separately; Interest is part of finance costs.
Lessee cash flows (para 50): Principal → financing; interest → financing (per Ind AS 7); short-term, low-value and non-included variable payments → operating; Rule applies to the lessee only.
Lessor operating lease assets (paras 88, 95): Show by nature of asset; disaggregate each PPE class into leased-out and owned; Disclosures follow Ind AS 16.
Interest on lease liability: Interest = opening lease liability × discount rate; Illustration: ₹4,50,000 × 3% = ₹13,500 in Year 1.

Quick revision

A lessee recognises a right-of-use asset and a lease liability, except for the short-term and low-value exemptions.
The opening lease liability is the present value of the lease payments not yet paid.
Lease interest each period = opening liability × discount rate; closing liability = opening + interest − payment.
Lessee cash flows: principal and interest portions of the lease liability go to financing activities (paragraph 50).
Short-term lease payments, low-value asset lease payments and variable payments not in the liability go to operating activities (paragraph 50).
On reassessment, the discount rate stays unchanged unless the change in payments comes from a change in floating interest rates.
When a revised rate is needed, use the rate implicit in the lease if readily determined, else the incremental borrowing rate at the date of reassessment (paragraph 41).
A lessor classifies each lease as finance or operating, based on whether substantially all risks and rewards of ownership are transferred.
Finance lease lessor disclosures include selling profit or loss and finance income on the net investment (paragraph 90).
Operating lease lessor: show lease income, with income from variable payments not based on an index or rate shown separately (paragraph 90).
Sale and leaseback: both parties account for the transfer contract and the lease under paragraphs 99 to 103 (paragraph 98).
Lessor of operating leases applies the Ind AS 16 disclosures and separates leased assets from owned assets (paragraph 95).

Common mistakes

Including sales-based rent in the lease liability. Fix: Only fixed and index or rate-linked payments are included. Other variable payments go to profit or loss when incurred.
Extending the lease term simply because an option exists. Fix: Include the option period only if the lessee is reasonably certain to exercise it. Look for incentives such as improvements, penalties or the asset's importance.
Discounting payments already made on or before commencement. Fix: The liability is the present value of payments not yet paid at the commencement date. Treat advance payments separately in the ROU asset.
Charging rent expense for a lease that is not exempt. Fix: Unless the lease is short-term or low value, recognise depreciation and interest, not rent.
Treating a lease extension as a separate lease. Fix: A separate lease needs added right to use an underlying asset. An extension of term alone only changes the term of the existing lease, so remeasure the liability.
Using the original discount rate for a modification that is not a separate lease. Fix: For a modification, use a revised rate at the effective date of the modification. Keep the unchanged rate for residual value guarantee and index/rate changes, except where the change in payments results from a change in floating interest rates, in which case use a revised rate.
Classifying by legal form, calling a lease operating because title does not pass. Fix: Apply the risks and rewards test. A lease can be a finance lease without title passing, for example when the term covers the major part of the asset's life.
Recognising finance income on a straight-line basis. Fix: Finance income follows a constant periodic rate of return on the net investment, so it falls as the balance falls.
Recognising the full gain (fair value − carrying amount) in profit or loss. Fix: Split the gain. Only the gain relating to rights transferred is recognised; the ROU asset is measured at the proportion of the previous carrying amount that relates to the right of use retained.
Measuring the ROU asset at the lease liability or at fair value. Fix: Use carrying amount × PV of lease payments ÷ fair value.

Exam tips

In MCQs, watch for the words 'reasonably certain'. Facts about penalties, improvements or business importance usually signal the intended answer on term.
Write a short classification list of payments (included or excluded, with a reason). It earns marks even if your arithmetic slips.
State which rate you use and why. A line saying the implicit rate cannot be readily determined, so the IBR is used, is worth including.
For remeasurement questions, cite the trigger. A change in term needs a revised rate. A change in a residual value guarantee or an index does not.
Read the timing of payments carefully. Advance versus arrears changes the discount factors.
Start every numerical with the exemption check. A one-line conclusion can save a full page of working.
Show the liability schedule with opening, interest, payment and closing. Examiners give marks for each column.
State the discount rate you use and why, in one line.