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CA Final · Financial Reporting · Ind AS 116 Leases

Sahyadri Textiles Ltd (lessee) pays Rs 1,20,000 as the interest portion of its lease liability during the year under a lease of machinery. The company prepares its statement of cash flows under Ind AS 7. How should this interest portion be classified, as per Ind AS 116 as notified in India?

The interest portion of lease payments is classified as a financing activity. Ind AS 116 modifies the IFRS 16 wording and specifies this treatment applying Ind AS 7, which requires interest paid to be shown under financing activities, so there is no entity choice as under IFRS.

  1. AOperating activities, because interest is a recurring finance cost of running the business
  2. BInvesting activities, because the payment relates to acquiring a right-of-use asset
  3. CFinancing activities, because Ind AS 116 specifies this classification applying Ind AS 7Correct
  4. DOperating or financing activities at the entity's choice, as in IFRS 16

Explanation

Ind AS 116 modifies the IFRS 16 requirement and specifies that cash payments for the interest portion of the lease liability are classified as financing activities applying Ind AS 7. The IFRS choice between operating and financing does not exist under Ind AS because Ind AS 7 requires interest paid to be treated as financing. Hence the option giving a choice is wrong.

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