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CA Final · Financial Reporting · Ind AS 116 Leases

Tarang Pharma Ltd signs a contract with a warehouse owner. The contract gives Tarang the right to use a specified godown for 5 years in exchange for monthly payments. Tarang's auditor tests whether the contract falls within Ind AS 116. Which description matches the definition of a lease in Ind AS 116 Appendix A?

A lease is a contract, or part of a contract, that conveys the right to use an underlying asset for a period of time in exchange for consideration. Ownership transfer and advance payment are not required, so the godown contract fits this definition.

  1. AA contract, or part of a contract, that conveys the right to use an asset (the underlying asset) for a period of time in exchange for considerationCorrect
  2. BA contract that transfers legal ownership of an asset to the user at the end of the contract period
  3. CA contract that conveys the right to use an asset only if the user pays the entire consideration in advance
  4. DA contract under which the user obtains substantially all the output of any asset for an indefinite period

Explanation

Appendix A defines a lease as a contract, or part of a contract, that conveys the right to use an underlying asset for a period of time in exchange for consideration. Transfer of legal ownership and advance payment are not required, so those distractors add conditions absent from the definition. The godown contract fits the definition.

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