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CA Final · Financial Reporting · Ind AS 116 Leases

Sagar Textiles Ltd, an Ind AS reporter, has taken a factory building on lease and recognised a lease liability. Its finance team is preparing the Statement of Cash Flows and asks how the cash paid towards the interest portion of the lease liability should be classified. IAS 7 under IFRS allows a choice for interest paid. What is the treatment under Ind AS 116 read with Ind AS 7?

The interest portion of lease liability payments is classified as financing activities. Ind AS 116 specifies this, applying Ind AS 7, which requires interest paid to be treated as financing only. Unlike IAS 7 under IFRS, Ind AS gives no option to show it as operating activity.

  1. AAs financing activities, because Ind AS 7 requires interest paid to be treated as financing onlyCorrect
  2. BAs operating activities, as is the practice for all lease payments
  3. CAs investing activities, because the right-of-use asset is a non-current asset
  4. DAt the entity's choice between operating and financing activities, as under IFRS

Explanation

Ind AS 116 modifies the IFRS 16 paragraph so that cash payments for the interest portion of the lease liability are classified as financing activities applying Ind AS 7. Ind AS 7 does not give the operating or financing choice that IAS 7 gives. The option of choosing is therefore wrong for an Ind AS reporter.

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