Corporate Financial Reporting · Leases (Ind AS 116)

Lessee Accounting under Ind AS 116: Recognition and Measurement

Updated 11 October 2026 · Fact-checked

Under Ind AS 116, a lessee uses one model for nearly all leases. At commencement you recognise a lease liability at the present value of unpaid lease payments and a right-of-use asset. Afterwards you charge depreciation on the asset and interest on the liability. Short-term and low-value leases may be expensed instead.

Understand Lessee Accounting: Recognition and Measurement

Before Ind AS 116, lessees split leases into finance and operating leases. Operating leases stayed off the balance sheet. Ind AS 116 removes this split for lessees. You have one model: the lessee records the right to use an asset and the obligation to pay for it.

At the commencement date, you recognise two items. The lease liability is the present value of lease payments not yet paid, discounted at the rate implicit in the lease, or the lessee's incremental borrowing rate if the implicit rate cannot be readily determined. The right-of-use (ROU) asset starts at the lease liability, plus lease payments made at or before commencement (less incentives received), plus initial direct costs, plus estimated restoration costs.

After commencement, the two items move separately. The ROU asset is measured on a cost model (paragraph 29), unless the revaluation model applies under paragraph 35: if the ROU asset relates to a class of PPE to which the lessee applies the revaluation model in Ind AS 16, the lessee may elect to apply it to all ROU assets of that class. Under the cost model you depreciate the asset, normally straight-line, over the lease term (or the useful life if ownership passes or a purchase option is reasonably certain to be exercised). The lease liability grows by interest at the discount rate and falls by each payment made.

The statement of profit and loss therefore shows depreciation and interest, not a single rent expense. The charge is front-loaded: interest is highest in early years when the liability is highest.

There are two recognition exemptions (paragraph 5). A lessee may elect not to apply the main requirements to short-term leases and to leases of low-value assets. Then the lease payments are expensed straight-line over the lease term, or on another systematic basis if it better reflects the pattern of benefit (paragraph 6). Short-term election is made by class of underlying asset. Low-value election can be made lease by lease (paragraph 8).

Key rules to remember

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.

How to solve Lessee Accounting: Recognition and Measurement questions

Use this order for any lessee numerical. It keeps the workings clean and earns step marks.

1Check the exemptions first. If the lease is short-term (and the class is elected) or the asset is low value and not subleased, expense the payments straight-line and stop.
2Fix the lease term and the list of payments with their dates. Note whether payments fall at the start or end of each year.
3Choose the discount rate: the rate implicit in the lease if given, else the incremental borrowing rate.
4Compute the present value of the unpaid payments. This is the lease liability.
5Build the ROU asset: liability plus advance payments, initial direct costs and restoration cost, less incentives.
6Prepare the liability schedule: opening, interest, payment, closing for each year.
7Compute depreciation on the ROU asset over the correct period.
8Write the journal entries and the profit and loss charge (depreciation plus interest), and show the balance sheet figures if asked.

Quickest way: Table-first approach for ROU asset and liability

When to use it: Use for a multi-year lease with equal payments when the question gives a discount rate and present value factors.

Write the payment, the PV factor and the lease liability in one line.
Add any advance payments or direct costs to get the ROU asset.
Draw a four-column table: opening, interest, payment, closing. Fill only the years asked.
Check the last closing balance is nil (allow rounding). If not, recheck the factors.
Year charge = depreciation + interest. Write it as one line for the answer.

Common mistakes in Lessee Accounting: Recognition and Measurement

Discounting payments already made on or before commencement.
Students discount the whole payment schedule.
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.
Habit from the old operating lease treatment.
Fix: Unless the lease is short-term or low value, recognise depreciation and interest, not rent.
Calling a lease low value because it is old or the lessee is large.
Students apply a materiality or age view.
Fix: Value is assessed on an absolute basis, for the asset when new, regardless of age or lessee size. A car does not qualify. A head lease the lessee subleases, or expects to sublease, does not qualify.
Depreciating the ROU asset over the asset's full useful life by default.
Students copy the Ind AS 16 approach.
Fix: Use the shorter of lease term and useful life, unless ownership transfers or a purchase option is reasonably certain to be exercised.
Computing interest on the original liability every year.
Treating it like simple interest.
Fix: Interest = opening liability for that year × rate. The opening balance falls as payments are made.
Applying the short-term exemption lease by lease.
Confusing it with the low-value rule.
Fix: Short-term election is made by class of underlying asset. Low-value election can be made lease by lease.

Worked examples

Example 1

On 1 April 2026, Kaveri Ltd leases machinery for 3 years. Lease rentals of ₹1,00,000 are payable at the end of each year. The incremental borrowing rate is 10% (implicit rate not determinable). PV factors at 10%: year 1 = 0.9091, year 2 = 0.8264, year 3 = 0.7513. No other costs. Compute the lease liability, ROU asset, and the statement of profit and loss charge for 2026-27. Depreciation is straight-line over the lease term.

Show the solution

Lease liability = 1,00,000 × (0.9091 + 0.8264 + 0.7513) = 1,00,000 × 2.4868 = ₹2,48,680.
ROU asset = ₹2,48,680, as there are no advance payments, direct costs or incentives.
Journal at commencement: Dr ROU Asset ₹2,48,680; Cr Lease Liability ₹2,48,680.
Depreciation 2026-27 = 2,48,680 ÷ 3 = ₹82,893 (rounded).
Interest 2026-27 = 2,48,680 × 10% = ₹24,868.
Payment on 31 March 2027: closing liability = 2,48,680 + 24,868 − 1,00,000 = ₹1,73,548.
Total charge 2026-27 = 82,893 + 24,868 = ₹1,07,761.

Answer: Lease liability and ROU asset are each ₹2,48,680. The 2026-27 charge is ₹1,07,761 (depreciation ₹82,893 plus interest ₹24,868). The closing lease liability is ₹1,73,548.

Example 2

Anand Traders took 20 tablet computers on a 2-year lease at ₹60,000 per year. Each tablet costs ₹25,000 when new. It also took a 9-month lease of a godown at ₹40,000 per month and elected the short-term exemption for its class of godowns. Explain the treatment and compute the expense for the year ended 31 March 2027 if both leases ran fully within that year.

Show the solution

Tablets are named in the standard as examples of assets that can be of low value, and they can be used on their own. They are not highly dependent on other assets. Value is judged on the asset when new, on an absolute basis.
If the entity elects the low-value exemption and does not sublease, it expenses the payments straight-line over the lease term (paragraph 6). Annual expense is ₹60,000 for this one-year period.
The godown lease is for 9 months, so it is a short-term lease (12 months or less, with no purchase option). With the class election made, the payments are expensed straight-line.
Godown expense = 9 × 40,000 = ₹3,60,000.
Total expense = 60,000 + 3,60,000 = ₹4,20,000. No ROU asset or lease liability is recognised.

Answer: Both leases are expensed straight-line with no balance sheet recognition. The total lease expense is ₹4,20,000, of which ₹60,000 relates to the tablets and ₹3,60,000 to the godown.

Exam tips

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.
In MCQs, test the exact wording of the low-value rule: absolute basis, value when new, no sublease, cars do not qualify.
Show the journal entries with narrations. Commencement, interest, payment and depreciation entries are each marked.

Practice questions from Leases (Ind AS 116)

Lessee Accounting: Recognition and Measurement in other exams

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

Lessee Accounting: Recognition and Measurement: frequently asked questions

What is the difference between the right-of-use asset and the lease liability?

The lease liability is the present value of unpaid lease payments. The right-of-use asset is your right to use the leased asset and starts from the liability plus certain other costs. After day one they differ: the asset is depreciated and the liability grows with interest and falls with payments.

Which rate do I use to discount lease payments?

Use the rate implicit in the lease if it can be readily determined. Otherwise use the lessee's incremental borrowing rate. Always use the rate the question gives.

Does the low-value exemption depend on the size of my company?

No. The test is absolute and is not affected by the size, nature or circumstances of the lessee. It looks at the value of the asset when new, and a lease does not qualify if the asset is subleased or expected to be subleased.

How are exempt leases expensed?

The lessee recognises the lease payments as an expense straight-line over the lease term, or on another systematic basis if that better reflects the pattern of benefit. No ROU asset or lease liability is recognised for them.