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CA Final · Financial Reporting · Ind AS 116 Leases

Tarang Textiles Ltd, an Ind AS reporting company, has recognised a lease liability for a leased warehouse. In preparing its statement of cash flows, the finance team is debating where to present the cash paid as the interest portion of the lease liability. Which presentation is consistent with Ind AS 116 read with Ind AS 7?

The interest portion of lease liability payments is shown under financing activities. Ind AS 116 specifies this classification applying Ind AS 7, and Ind AS 7 requires interest paid to be treated as a financing activity only. The IFRS option to show it as operating does not exist in Ind AS.

  1. AOperating activities, because interest on lease is an operating cost
  2. BFinancing activities, because Ind AS requires the interest portion of lease liability payments to be classified thereCorrect
  3. CInvesting activities, because the right-of-use asset is a non-current asset
  4. DEither operating or financing activities, 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. Unlike IFRS, where IAS 7 allows a choice between operating and financing, Ind AS 7 requires interest paid to be treated as financing only. The choice option is therefore wrong under Ind AS.

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