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CA Final · Financial Reporting · Ind AS 116 Leases

Vindhya Power Ltd entered into a contract giving it the right to use a specified turbine for 5 years at Rs 30 lakh per year. The lessee also receives a separate maintenance service from the supplier. An analyst states four views on whether the contract contains a lease. Which view fits the definition of a lease in Ind AS 116?

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. The turbine right fits this, while title transfer or economic life coverage is not required by the definition.

  1. AA lease is any contract for services over a period of time in exchange for consideration
  2. BA lease is a contract, or part of a contract, that conveys the right to use an asset for a period of time in exchange for considerationCorrect
  3. CA lease exists only if legal title to the asset passes to the customer at the end of the term
  4. DA lease exists only if the contract term covers the major part of the asset's economic life

Explanation

Ind AS 116 defines a lease as a 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 consideration. The turbine portion conveys such a right, so it is the lease component. Title transfer or economic life tests are not part of the definition.

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