Corporate Financial Reporting · Leases (Ind AS 116)

Scope, Definitions and Identifying a Lease under Ind AS 116

Updated 11 October 2026

Under Ind AS 116, a contract is, or contains, a lease if it conveys the right to control the use of an identified asset for a period of time in exchange for consideration. You test for an identified asset, then the right to obtain substantially all benefits and the right to direct use, then separate components.

Understand Scope, Definitions and Identifying a Lease

Ind AS 116 starts with one question: does the contract give the customer control over the use of a specific asset for a period? If yes, it is a lease and the customer (lessee) accounts for it as a lease. If no, it is a service or supply contract and is treated under other standards.

The standard says that at inception of a contract, you assess whether the contract is, or contains, a lease. A contract is, or contains, a lease if it conveys the right to control the use of an identified asset for a period of time in exchange for consideration.

Control has two parts. Throughout the period of use, the customer must have both: (a) the right to obtain substantially all of the economic benefits from use of the identified asset, and (b) the right to direct the use of the identified asset. Miss either one and there is no lease.

The right to direct use means the customer can change how and for what purpose the asset is used. Paragraph B26 gives examples: changing the type of output, when the output is produced, where it is produced, and whether it is produced and how much. The decision-making rights that matter are those that affect the economic benefits from use.

A contract may contain more than one component. You account for each lease component separately from non-lease components, unless the entity applies the practical expedient in paragraph 15. The detail of that expedient is in the full standard, not in the extract used here. You also assess each potential separate lease component on its own. Reassess whether a contract is or contains a lease only if its terms and conditions change.

Key rules to remember

Definition of a lease (para 9): Lease = 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. All parts must be present.
Control test (para B9): Control = right to obtain substantially all economic benefits (B9a) + right to direct the use (B9b), throughout the period of use; Both limbs are needed. One alone is not enough.
Separate lease component (para B32): Separate component if (a) lessee can benefit from the asset alone or with readily available resources AND (b) asset is neither highly dependent on nor highly interrelated with other assets in the contract; Both conditions must hold. Example: the lessee could decline to lease the asset without significantly affecting its rights to use other assets.
Separating components (para 12): Account for each lease component separately from non-lease components, unless the practical expedient in para 15 is applied; Para 12 itself points to the practical expedient in para 15. The detail of para 15 is in the full standard, not in the extract used here.
Partial term (para B10): Control for only a portion of the contract term = lease for that portion only; Do not treat the whole term as a lease.
Reassessment (para 11): Reassess only if the terms and conditions of the contract change; A change in circumstances alone does not trigger reassessment.
Lessor allocation (para 17): Lessor allocates consideration applying paras 73 to 90 of Ind AS 115; The lessee's allocation rule is in para 13 of Ind AS 116, which is outside the extract used here.

How to solve Scope, Definitions and Identifying a Lease questions

Use this order for any 'is there a lease' question. Quote facts from the case against each test.

1Identify the contract and the date of inception. State that the assessment is made at inception.
2Check whether there is an identified asset: is it specified in the contract, and can the supplier substitute it? Under B14 (in the full standard, outside the extract used here), a substitution right is substantive only if the supplier has the practical ability to substitute alternative assets throughout the period of use and would benefit economically from doing so. If the right is substantive, there is no identified asset.
3Test the right to obtain substantially all economic benefits from use throughout the period of use.
4Test the right to direct the use: who decides how and for what purpose the asset is used, for example type, timing, place and quantity of output (B26)?
5Conclude: lease only if both limbs are met. If only part of the term gives control, a lease exists for that portion (B10).
6Split the contract into components. Apply B32 to find separate lease components and separate them from non-lease components such as maintenance or services.
7Treat charges for administrative tasks or costs that transfer no good or service as part of total consideration, not as a separate component (B33). Then state the accounting consequence.

Quickest way: Three-question lease screen

When to use it: Use for MCQs and for short case parts where you must decide quickly whether a contract is a lease.

Q1: Is there an identified asset? It must be a specific asset, and the supplier must have no substantive right to substitute it. If no, stop: not a lease.
Q2: Does the customer get substantially all the economic benefits from using it throughout the period of use? If no, stop.
Q3: Does the customer have the right to direct how and for what purpose it is used? If no, stop.
Then confirm the right to control the asset is for a period of time in exchange for consideration. If yes to all of Q1 to Q3 and this check, it is a lease.
Then check for bundled services: separate them unless the practical expedient is chosen.

Common mistakes in Scope, Definitions and Identifying a Lease

Treating every contract that names an asset as a lease.
Students stop after the identified asset test.
Fix: Always complete both limbs of B9: benefits and right to direct use. Without both, it is a service contract.
Ignoring the supplier's substitution right.
The asset is named, so it looks identified.
Fix: Check whether the supplier can substitute the asset. Under B14 (in the full standard, outside the extract used here), a substitution right is substantive only if the supplier has the practical ability to substitute the asset throughout the period of use and would benefit economically from doing so. If it is substantive, there is no identified asset.
Treating the whole contract as a lease when control exists for only part of the term.
Students think a contract is all-or-nothing.
Fix: Apply B10: the contract contains a lease for that portion of the term only.
Treating administrative charges as a separate component.
Any separately listed charge looks like a separate item.
Fix: Under B33, amounts for activities that transfer no good or service are part of total consideration allocated across the components.
Reassessing the lease every year or when the business changes.
Confusion with lease term reassessment.
Fix: Under para 11, reassess whether a contract is or contains a lease only if its terms and conditions are changed.
Combining lease and non-lease components automatically.
Students assume a single price means a single component.
Fix: Separate them under para 12 unless the entity applies the practical expedient in para 15, and say so in your answer.

Worked examples

Example 1

Rohan Logistics Ltd enters a 5-year contract with Sagar Transport to use 10 specified trucks, identified by registration number. Sagar has no right to substitute them. Rohan decides routes, loads, timing and destinations, and gets all the output from the trucks. Sagar also provides a maintenance service for a fixed fee. Does the contract contain a lease? How should it be accounted for?

Show the solution

Identified asset: the trucks are specified by registration and Sagar cannot substitute them, so there is an identified asset.
Economic benefits: Rohan uses the trucks throughout the period and gets all the output, so it has substantially all the economic benefits (B9a).
Right to direct use: Rohan decides destination, timing and what is carried. These are decision rights under B26, so it directs the use (B9b).
Both limbs are met, so the contract contains a lease (para 9).
Components: the trucks are lease components and maintenance is a non-lease component. Under para 12, Rohan accounts for them separately unless it applies the para 15 practical expedient.
If the trucks are not highly dependent on or interrelated with each other and can be used on their own, each truck or group may be a separate lease component under B32.

Answer: Yes, the contract contains a lease of the trucks. Rohan accounts for the lease component separately from the maintenance service, unless it applies the practical expedient in para 15.

Example 2

Meera Foods Ltd signs a 3-year contract with a warehouse operator for storage space. The operator can move Meera's goods to any similar space in its facility at any time, at its own cost, and benefits from doing so. Meera cannot decide how the space is used beyond storing its goods. Is there a lease?

Show the solution

Para 9 and B9 require an identified asset and both control limbs. The supplied extract does not set out the test for a supplier's substitution right. That test is in B14 of the full standard, which you should confirm in the study material before relying on it.
Applying the B14 test as understood from the full standard: a substitution right is substantive if the supplier has the practical ability to substitute alternative assets throughout the period of use and would benefit economically from doing so. The operator can move Meera's goods to any similar space at any time and benefits from doing so, so the right is substantive and there is no identified asset.
Without an identified asset, the contract does not convey the right to control the use of an identified asset, so it is not a lease under para 9.
Because the identified asset test fails, you do not need to go on to test the two control limbs in B9 (benefits and right to direct use). The failure of the first test is enough to conclude.
Conclusion: the contract is a service contract, not a lease.

Answer: The contract does not contain a lease because there is no identified asset: the operator's right to substitute the space is substantive. Once that test fails, the control limbs need not be tested. Meera accounts for it as a service contract, expensing the charges as the service is received.

Exam tips

Write the tests in order: identified asset, benefits, right to direct use. Marks are given for applying each to the facts.
Quote the key phrase 'right to control the use of an identified asset for a period of time in exchange for consideration' in definition questions.
In MCQs, look for the trap: a named asset with a substantive substitution right, or a supplier who decides how the asset is used.
If the case mentions a service or maintenance fee, always add the component separation point and the practical expedient.
State clearly 'lease' or 'not a lease' as your conclusion, then the accounting consequence.

Practice questions from Leases (Ind AS 116)

Scope, Definitions and Identifying a Lease: frequently asked questions

What makes a contract a lease under Ind AS 116?

A contract is, or contains, a lease if it conveys the right to control the use of an identified asset for a period of time in exchange for consideration. The customer must have both the right to obtain substantially all the economic benefits and the right to direct the use of the asset.

What does right to direct the use mean?

It means the customer can change how and for what purpose the asset is used throughout the period of use. Examples are deciding the type of output, when and where it is produced, and whether and how much is produced.

When do I separate lease and non-lease components?

When a contract contains a lease and other components such as services, you account for each lease component separately from non-lease components. The exception is where the entity applies the practical expedient in para 15. The detail of that expedient is in the full standard, so check it there.

When must I reassess whether a contract is a lease?

Only when the terms and conditions of the contract are changed. A change in the entity's plans or market conditions alone does not trigger this reassessment.