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CA Final · Financial Reporting · Ind AS 116 Leases

Tapi Pharma Ltd signs a contract with a service provider for 'storage services'. Under the contract, Tapi gets a right to use an identified cold-storage chamber for 5 years and pays Rs 8,00,000 a year. A second part of the contract covers pest control services for the whole warehouse, priced separately at Rs 50,000 a year, with no right to use any asset. Which view is consistent with the definition of a lease in Ind AS 116?

The chamber element is a lease and the pest control element is not. Ind AS 116 defines a lease as a contract, or part of a contract, conveying the right to use an asset for a period of time in exchange for consideration; pest control conveys no such right.

  1. AThe whole contract is a lease because it contains one lease element
  2. BOnly the pest control part is a lease because it is paid every year
  3. CPart of the contract that conveys a right to use an asset for a period of time in exchange for consideration is a lease; the chamber element qualifies, the pest control element does notCorrect
  4. DNone of the contract is a lease because services are included in it

Explanation

Ind AS 116 defines a lease as a contract, or part of a contract, that conveys the right to use an asset for a period of time in exchange for consideration. The identified chamber element conveys a right to use and qualifies. Pest control conveys no right to use an asset, so it is not a lease. The view that the whole contract is a lease ignores the 'part of a contract' wording.

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