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CA Final · Financial Reporting · Ind AS 116 Leases

Sagar Textiles Ltd (Ind AS reporting entity) has a lease liability on a factory building lease. In preparing its statement of cash flows for the year, the finance team debates where to present the cash payments for the interest portion of the lease liability. Under Ind AS 116 as notified in India, how should these interest payments be classified?

Cash payments for the interest portion of a lease liability are classified as financing activities under Ind AS 7. Unlike IFRS, which permits operating or financing treatment, Ind AS 7 requires interest paid to be shown only within financing activities, so no policy choice exists.

  1. AOperating activities, because interest on lease is a cost of running the business
  2. BFinancing activities, applying Ind AS 7Correct
  3. CInvesting activities, because the right-of-use asset is a non-current asset
  4. DEither operating or financing activities, as an accounting policy choice

Explanation

Ind AS 116 modifies the IFRS 16 requirement so that cash payments for the interest portion of the lease liability are classified as financing activities applying Ind AS 7. IFRS allows a choice between operating and financing under IAS 7, but Ind AS 7 requires interest paid to be financing only, so the policy-choice option is wrong.

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