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CA Final · Financial Reporting · Ind AS 116 Leases

Tarang Textiles Ltd. (Ind AS reporter) has taken a warehouse on lease. It pays Rs 6,00,000 annually, and the lease liability carries interest. The CFO asks how the cash payments for the interest portion of the lease liability must be shown in the statement of cash flows. Under Ind AS 116 as notified in India, how are these interest payments classified?

Interest paid on a lease liability is shown under financing activities in the cash flow statement, applying Ind AS 7. Unlike IFRS, where IAS 7 gives a choice between operating and financing, Ind AS 7 permits only financing treatment for interest paid, so no choice exists in India.

  1. AAs operating activities, because lease payments relate to running the business
  2. BAs financing activities, applying Ind AS 7Correct
  3. CAs investing activities, because a right-of-use asset is acquired
  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 allows a choice through IAS 7, but Ind AS 7 allows interest paid only as financing. The option of choosing operating is therefore not available.

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