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CMA Final · Corporate Financial Reporting · Leases (Ind AS 116)

Meera Retail Ltd leases a showroom for 4 years. The fixed lease payments have a present value of Rs 3,00,000. In addition, the lessee pays 1% of annual sales as rent, and expects year 1 sales of Rs 50,00,000. This sales-linked payment is not based on an index or rate. What is the initial lease liability, and how is the Rs 50,000 variable payment for year 1 treated?

The initial lease liability is Rs 3,00,000, covering fixed payments only. Sales-linked rent that does not depend on an index or rate is excluded from the liability and is recognised in profit or loss in the period in which the sales trigger the payment, so Rs 50,000 is expensed for year 1.

  1. ARs 3,50,000; the variable payment is included in the liability and then reduced as paid
  2. BRs 3,00,000; the variable payment is recognised in profit or loss in the period it is incurredCorrect
  3. CRs 3,00,000; the variable payment is capitalised into the right-of-use asset
  4. DRs 3,50,000; the variable payment is recognised only at the end of the lease term

Explanation

Variable payments that do not depend on an index or rate are excluded from the lease liability. The liability is therefore only the Rs 3,00,000 present value of fixed payments. The Rs 50,000 is charged to profit or loss in the period in which the sales condition occurs. Including it in the liability or capitalising it would be wrong.

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