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CA Final · Financial Reporting · Ind AS 116 Leases

Sagar Textiles Ltd. (an Ind AS reporting company) has recognised a lease liability and a right-of-use asset for a factory building taken on lease. It pays the fixed periodic lease instalments in cash. How must Sagar Textiles classify, in its statement of cash flows, the cash payments for the interest portion of the lease liability under Ind AS 116 read with Ind AS 7?

Cash payments for the interest portion of a lease liability are classified as financing activities. Ind AS 116 modifies the IFRS 16 position because Ind AS 7 requires interest paid to be shown under financing activities only, with no option to present it under operating activities.

  1. AOperating activities only
  2. BFinancing activitiesCorrect
  3. CInvesting activities
  4. DOperating or financing activities, at the entity's option

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. IFRS 16 allows an option through IAS 7, but Ind AS 7 requires interest paid to be treated as financing only. So the option permitting operating classification is wrong for Indian reporters.

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