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CA Final · Financial Reporting · Ind AS 116 Leases

Sagar Textiles Ltd, an Ind AS reporter, pays the interest portion of its lease liability on a leased warehouse every quarter. The finance head asks how this cash outflow should be presented in the Statement of Cash Flows. Which presentation is correct under Ind AS 116 read with Ind AS 7?

The interest portion of lease liability payments is shown as a financing activity. Ind AS 116 modifies the IFRS 16 requirement so that these payments are classified under financing activities applying Ind AS 7, because Ind AS 7 does not allow interest paid to be treated as operating activity.

  1. AAs an operating activity, because lease interest relates to the day-to-day use of the warehouse
  2. BAs a financing activity, because Ind AS 116 requires the interest portion of lease payments to be classified under financing activitiesCorrect
  3. CAs an investing activity, because the warehouse is a right-of-use asset
  4. DEither operating or financing activity, at the option of the entity, as allowed by IAS 7

Explanation

Ind AS 116 (as modified from IFRS 16) specifies 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/financing choice for interest paid that IAS 7 gives. Hence the option of choice is the IFRS position and is wrong for Ind AS.

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