CMA Final · Corporate Financial Reporting

Leases (Ind AS 116) for CMA Final Paper 18

Ind AS 116 sets how leases are accounted for. A lessee recognises a right-of-use asset and a lease liability for almost every lease. A lessor classifies each lease as finance or operating. To solve questions, find the lease term, discount the lease payments, then build the liability, depreciation and interest schedule.

What this chapter covers

Ind AS 116 Leases is a core chapter of Paper 18, Corporate Financial Reporting. It tells you how to decide whether a contract is, or contains, a lease, and how the lessee and the lessor record it. The big shift from the old approach is on the lessee side. A lessee shows a right-of-use asset and a lease liability on the balance sheet, instead of treating most leases as off-balance-sheet rent.

The chapter builds in a clear chain. First you identify a lease. Then you fix the lease term, the lease payments and the discount rate. Those three inputs drive the opening lease liability. After that come the yearly schedule, modifications and reassessment, the lessor side, sale and leaseback, and finally presentation and disclosure.

This chapter connects to other parts of the paper. It uses present value, as in financial instruments. It links with Ind AS 16 for depreciation and with Ind AS 36 for impairment. Sale and leaseback uses the revenue standard, Ind AS 115, to decide whether a sale has taken place. Cash flow questions use Ind AS 7. So the chapter also helps you in other topics.

Leases suit both parts of the exam. Section A can test short rules, such as where lease payments go in the cash flow statement, or which discount rate applies on reassessment. The written section can ask for a full lessee schedule, a modification, or a sale and leaseback with journal entries. The workings are mechanical, so a well-practised student can score full marks. The rules are also stated in precise words, so a clear grasp of the standard's wording protects you from small errors that cost marks.

Leases (Ind AS 116): topics in the order to study them

1Scope, Definitions and Identifying a LeaseYou need the key terms and the test for a lease before any numbers make sense.
2Lease Term, Lease Payments and Discount RateThese three inputs decide the opening liability, so master them before building schedules.
3Lessee Accounting: Recognition and MeasurementThis is the heaviest numerical topic and uses the inputs from the previous topic.
4Lease Modifications and ReassessmentIt extends the lessee schedule, so study it once the base schedule is easy for you.
5Lessor Accounting: Finance and Operating LeasesIt mirrors the lessee side but with a different logic, so it comes after lessee work is firm.
6Sale and Leaseback TransactionsIt combines transfer of an asset with lessee accounting, so you need both sides first.
7Presentation and Disclosure RequirementsDisclosure is easiest to learn once you know what is recognised and measured.

How to prepare Leases (Ind AS 116)

Treat this chapter as one chain of workings. Practise the numbers every day, and learn the rules as short statements.

Read the definitions once and write a one-line test for each: identified asset, right to control use, lease term, lease payments.
Learn the lessee schedule format. Practise a plain case with equal annual payments until you can finish it in a few minutes: opening liability, interest, payment, closing liability, depreciation.
Add the extras one at a time: payments at the start of the year, initial direct costs, lease incentives, restoration costs, and the short-term and low-value exemptions.
Study reassessment and modifications as a decision tree. Ask first whether it is a modification or a change in estimate. Then ask which discount rate applies. Paragraphs 41 and 43 say the revised rate is the rate implicit in the lease if it can be readily determined, otherwise the incremental borrowing rate. The rate stays unchanged unless payments change because of floating interest rates.
Learn lessor classification with the finance versus operating test, then practise the entries for each.
For sale and leaseback, first decide whether the transfer is a sale under Ind AS 115. Then practise the entries. Learn the disclosure points listed in paragraph B52, and the cash flow classification in paragraph 50.
Finish with timed MCQs and one full written question. Check every working against the steps, not only the final answer.

Common mistakes in Leases (Ind AS 116)

Using the wrong lease term, such as the contract period alone, or ignoring options that are reasonably certain to be exercised.
Fix: Read the full scenario. Ask whether an extension or termination option is reasonably certain, then set the term and the payments to match.
Getting the timing of payments wrong in the liability schedule, treating advance payments as arrears.
Fix: Mark the payment dates on a timeline first. For payments at the start of the year, deduct the first payment before charging interest.
Changing the discount rate on every reassessment.
Fix: Remember the rule in paragraph 43: keep the rate unchanged unless the change in payments comes from floating interest rates. Use the paragraph 41 rate only when a revised rate is required.
Mixing up cash flow classification, putting the whole lease payment in operating activities.
Fix: Split the payment. Principal and interest on the lease liability go to financing. Only short-term, low-value and non-included variable payments go to operating.
Treating a sale and leaseback as a sale without testing the transfer.
Fix: First decide whether the transfer satisfies the sale requirements of Ind AS 115. Only then work out the gain and the right-of-use asset.
Applying the lessee approach to the lessor, or mixing finance and operating lease entries.
Fix: Keep a separate one-page summary for lessor accounting. Classify the lease first, then use only the entries for that class.

Last-day revision: Leases (Ind AS 116)

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).

Leases (Ind AS 116) practice questions

Leases (Ind AS 116) in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Leases (Ind AS 116): frequently asked questions

Is Ind AS 116 important for CMA Final Paper 18?

Yes. It is a core Ind AS chapter and gives scope for both short MCQs and long numerical answers. You can score well because the workings follow a fixed method. Do not rely on this page for any marks split.

What is the best way to start Ind AS 116?

Start with definitions and the lease identification test. Then move to lease term, payments and discount rate, and then the lessee schedule. This order matches how the numbers build up in an exam answer.

Which discount rate do I use when a lease is reassessed?

Keep the original rate unless the change in lease payments results from a change in floating interest rates. If a revised rate is needed, use the rate implicit in the lease for the remaining term if it can be readily determined. Otherwise use the lessee's incremental borrowing rate at the date of reassessment.

How are lease payments shown in the lessee's cash flow statement?

Principal and interest payments on the lease liability go to financing activities. Short-term lease payments, payments for low-value asset leases and variable payments not included in the lease liability go to operating activities.

What should I learn for sale and leaseback?

Learn that both seller-lessee and buyer-lessor account for the transfer and the lease using paragraphs 99 to 103. Check first whether the transfer is a sale under Ind AS 115. Also remember the disclosure points in paragraph B52, such as reasons for the transactions and the cash flow effect.