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CA Final · Financial Reporting · Ind AS 116 Leases

Sunrise Textiles Ltd (lessee) prepares its cash flow statement under Ind AS 7 and has recognised a lease liability for factory premises. During the year it paid Rs 12 lakh to the lessor, of which Rs 4 lakh represents interest on the lease liability and Rs 8 lakh represents repayment of principal. As per Ind AS 116 as modified from IFRS 16, how should the Rs 4 lakh interest portion be classified in the cash flow statement?

The Rs 4 lakh interest portion is classified under financing activities. Ind AS 7 requires interest paid to be treated as financing only, and Ind AS 116 states that cash payments for the interest portion of the lease liability follow this. The IFRS option to show it as operating does not exist in Ind AS.

  1. AOperating activities, as Ind AS 7 permits interest paid to be shown as operating
  2. BFinancing activities, as Ind AS 7 requires interest paid to be treated as financingCorrect
  3. CInvesting activities, because the lease relates to a long-term asset
  4. DEither operating or financing, at the option of the entity

Explanation

Ind AS 116 specifies that cash payments for the interest portion of the lease liability are classified as financing activities applying Ind AS 7. IFRS 16 allowed a choice through IAS 7, but Ind AS 7 requires interest paid to be financing only. The option of operating classification is therefore wrong.

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