1. A closer look at the new leases standard- Ind AS 116 CA (Dr
A closer look at the new leases standard- Ind AS 116 CA (Dr.) Sanjeev Singhal CA Amit Jain

2. Content Background Scope New Definition of lease Lessee accounting1
Background 2
Scope 3
New Definition of lease 4
Lessee accounting 5
Lessor accounting 6
Transition 7
Key differences

3. 1
Background

4. Background
On 30 March 2019, MCA has issued Ind AS 116 Leases and is effective from April 01, 2019.
Lessees will have a single on-balance sheet accounting model for all leases, with exemptions for short-term leases and leases of low-value assets
Lessor accounting is substantially unchanged.
Lessees and lessors will have additional disclosure requirements compared to current accounting
The new standard could have broad implications for entities’ finances, operations and EBITDA
Implementing the standard could require an entity to develop new processes and controls or adjust existing ones to identify and account for leases.

5. Effect of new leasing Standard
Percentage of US GAAP / IFRS companies who disclose off balance sheet leases :
Region %
North America
62%
Europe
47%
Asia / Pacific
43%
Latin America
23%
Africa / Middle East
Total future minimum payments for off balance sheet leases (undiscounted)
US$ 2.86
trillion
Present value of future minimum payments for off balance sheet leases (estimated at 5% discount rate)
US$ 2.18
Source IASB – New leasing standard effect analysis
For Listed Entities

6. 2
Scope

7. Scope
This standard is applicable to all lease arrangements except for the following:
Leases to explore for or use minerals, oil, natural gas and similar non-regenerative resources (Ind AS 106)
Leases of biological assets (Ind AS 41)
Service concession arrangements (Appendix D to Ind AS 115)
Licenses of intellectual property granted by lessor (Ind AS 115)
Rights held by a lessee under licensing agreements such items as motion picture films, video recordings, plays, manuscripts, patents and copyrights (Ind AS 38)

8. 3
New Definition of Lease

9. Ind AS 116 – Lease definition
A contract is, or contains, a lease if the contract conveys the RIGHT TO CONTROL the use of an IDENTIFIED ASSET for a period of time in exchange for consideration.
Leases
Identified asset
Customer has right to control the use A B
and
Explicitly / implicitly specified
No substantive
rights to substitute
Right to obtain substantially all economic benefits 3
Right to
direct the use 1 2 4
Ind AS 17: A lease is an agreement whereby the lessor conveys to the lessee in return for a payment or series of payments the right to use an asset for an agreed period of time.
Appendix C of Ind AS 17 : Arrangement contains a lease if the arrangement is dependent on the use of a specific asset and arrangement conveys a right to use the asset.

10. Identified assets Explicitly or implicitly specified
An asset can be either explicitly specified in a contract or implicitly specified at the time it is made available for use by the lessee.
Substantive substitution right:
A asset is not a identified asset if the lessor has a substantive right to substitute the asset for an alternative asset throughout the period of use.
A lessor's substitution right is 'substantive‘ if the lessor:
has the practical ability to substitute the asset throughout the period of use; and
would benefit economically from exercising its right to substitute the asset.
Evaluation of lessor’s substitution right should be made at the inception of the contract.
If the customer cannot readily determine whether the supplier has a substantive substitution right, the customer presumes that any substitution right is not substantive

11. Right to control 1) Right to economic benefit
To assess whether a contract conveys the right to control the use of an identified asset for a period of time, an entity is required to assess whether, throughout the period of use, the customer has both of the following:
1) Right to economic benefit
2) Right to direct the use

12. Right to economic benefits
To control the use of an identified asset, a customer must have the right to obtain substantially all of the economic benefits from use of the asset throughout the period of use. e.g. by having exclusive use of the asset throughout that period.
Economic benefits from use of an asset can be obtained by the customer in many ways e.g. by using, holding or sub-leasing the asset.
Such economic benefits include the primary output and by-products generated from use of the asset, and other economic benefits from using the asset
When assessing customer right to obtain substantially all of the economic benefits from the use of an assets, an entity considers the economic benefits that result from use of the asset within the defined scope of a customer's right to use the asset.
Examples:
(a) if a contract limits the use of a motor vehicle to only one particular territory during the period of use, an entity considers only the economic benefits from use of the motor vehicle within that territory.
(b) if a contract specifies that a customer can drive a motor vehicle only up to a particular number of miles during the period of use, an entity considers only the economic benefits from use of the motor vehicle for the permitted mileage.

13. Right to economic benefits
When assessing whether the customer has the right to direct the use of the identified asset, the key question is which party (customer or supplier) has the right to direct how and for what purpose the identified asset is used throughout the period of use.
The standard gives several illustrative examples of relevant decision-making rights:
Right to change what type of output is produced.
Right to change when the output is produced.
Right to change where the output is produced.
Right to change how much of the output is produced.
Relevance of each of the decision-making rights depends on the underlying asset being considered.
Decision-making rights are relevant when they affect the economic benefits to be derived from the use of the asset.
If both parties have decision-making rights, an entity considers the rights that are most relevant to changing how and for what purpose the asset is used.

14. Determining whether an arrangement contains a lease
Webcast title
8/5/2019
Determining whether an arrangement contains a lease
Is there an identified asset? No
Yes
Does the customer have the right to obtain substantially all of the
economic benefits from use of the asset throughout the period of use? No
Yes
Customer
Does the customer, the supplier or neither party have the right to direct how and for what purpose the asset is used throughout the period of use?
Supplier
Neither; how and for what purpose the asset will be used is predetermined
Yes
Does the customer have the right to operate the asset throughout the period of use without the supplier having the right to change those operating instructions? No
Did the customer design the asset (or specific aspects of the asset)
in a way that predetermines how and for what purpose the asset will be used throughout the period of use?
Yes No
The contract is or contains a lease
The contract is not or does not
contain a lease

15. Ind AS 116 A snap shot
Examples of relevant decision-making rights that grant the right to change how and for what purpose the asset is used : #
Identified Assets
Illustrative factors 1
Lease of trucks / aircraft / rail cars etc.
Which goods are transported?
When the goods are transported and to where?
How often the asset is used?
Which route is taken? 2
Retail unit
Which goods will be sold?
Prices at which the goods will be sold?
Where and how the goods are displayed? 3
Power plant
How much power will be delivered and when?
When to turn the power plant on/off? 4
Fibre-optic cable
When and whether to light the fibres?
What and how much data the cable will transport?
How to run the cable?
Which routes will be used to deliver the data?

16. Case Study Particulars Identified Lessor has
Customer has right to control the use of the
Lease?
asset?
substitution
identified asset?
rights?
Right to
Right to direct
the
use
economic
benefits 1.
Contract entered between
Yes No
Yes
Yes
Yes
customer and a freight carrier
Specific rails
Customer
has a right to
direct
(Supplier), to
provides
cars identified
when and where
the cars are
customer with the use of 10
in contract.
used, and which goods are
rail cars of a particular type
for
transported
i.e. he is having a
right
five years.
to change how and for what
Lessor cannot provide
purpose the rail
cars are used.
alternative
rail car. 2.
Coffee company (Customer) No
Yes
Yes No No
enters into a contract with an
Many areas
Supplier has
Supplier selects
which space is
airport operator (Supplier) to
are available
alternative to
allocated to Customer and obtains
use a space in the airport to
for
Customer
use its space
substantially all of the
economic
sell its goods
for a
3 years
and none are
in most
benefits from use of the
period.
specified in
efficient
concession space.
the
contract.
manner.

17. Case Study Particulars Identified Lessor has
Customer has right to control the use of the
Lease?
asset?
substitution
identified asset?
rights?
Right to
Right to direct
the
use
economic
benefits
A has entered a contract to lease 10 trucks for a period of 6 years.
The trucks will be used to transport goods across Europe. When not in use these trucks will be kept at A’s premises.
If the tucks are damaged or require maintenance then they will be sent back to supplier.
The contract also provide for renting of additional trailers on an ad-hoc basis . There trailers will be kept by supplier. No
Yes
Yes No No
Supplier
can
Lessee will
deliver any
enjoy
y all
truck it has
the
available
economic
benefits

18. What can be an Identified Assets ?
Illustrative examples of an Identified Assets, provided it satisfies lease definition :
Specific cars / truck / ship / aircraft to transport the goods as mentioned in the contract.
Specific retail unit identified in the contract.
Access of premises for installation of telecom equipment on telecom towers.
Portion of an asset can be an identified asset if it is physically distinct e.g. a floor of a building.
Fibre-optic cable if it represents substantially all of the capacity of the cable.

19. 4
Impact on Lessee accounting

20. Lessee accounting overview
The new on/off-balance sheet test for lessees – a key judgement area
Lease classification test ON
New standard
Lease
Finance lease/ operating lease
Old standard
Ind AS 17 deal with dual accounting approach i.e. both on balance sheet and off balance sheet accounting model. While Ind AS 116 covers only balance sheet accounting model.
Ind AS 116 is not applicable on the service component of a combined contract. Example of service contract – cleaning, security services included in a contract for building lease.

21. Recognition and measurement
A lessee applies a single lease accounting model under which it recognises all major leases on-balance sheet
Balance sheet
Asset = ‘Right-of-use’ of underlying asset
Liability = Obligation to make lease payments
Profit and Loss
Lease expense = Depreciation + Interest

22. Initial measurement – ROU
Lease liability
Initial direct costs
Estimated costs to dismantle, remove or restore, measured
In accordance with Ind AS 37
Prepaid lease payments
Lease incentives received
Right-of-use-asset

23. Initial measurement – ROU Initial direct costs
Typical initial direct costs of a lease :
Include
Exclude
Commissions
Legal fees*
Costs of negotiating lease terms and conditions*
Payments made to existing tenants to obtain the lease.
* If they are contingent on origination of the lease
General overheads
Costs to obtain offers for potential leases

24. Initial measurement – Lease liability
Initial measurement of lease liability :
Lease liability shall be recognised at the PV of the outstanding lease payments*.
Such lease payments shall be discounted using the interest rate implicit in the lease. If that rate cannot be readily determined, the lessee shall use its incremental borrowing rate.
Lease liability include the payments on account of :
Fixed payments less any lease incentives
Variable lease payments that depend on an index or a rate
Exercise price of a purchase option
Penalties for terminating the lease
Residual value guarantees by lessee
*Any upfront deposits are not included in the lease payments.
Lease liabilities are financial liabilities.

25. Subsequent measurement – Lease liability
Measurement basis :
Particulars
Amount
At Costs
XXX
Less : Accumulated Depreciation
Less : Accumulated impairment losses
WDV of ROU
XXXX
If lessee is reasonably certain not to obtain ownership, ROU will be depreciated over (whichever is shorter)
The lease term
Its useful life
If lessee is reasonably certain to obtain the ownership, ROU will be depreciated over the useful life.
The ROU is subsequently measured using the cost model. However, it may be revalued if it belongs to a class of assets that are revalued.

26. Example
Example
Lessee enters into a three-year lease of equipment. The arrangement provides the following:
Lease term
Three years
Annual payments
Year 1 – CU10,000
Year 2 – CU12,000
Year 3 – CU14,000
Discount rate
4.235%
Present value (PV) of lease payments
CU33,000

27. Response Example Initial Year 1 Year 2 Year 3 Cash lease payments
CU10,000
CU12,000
CU14,000
Lease expense recognised:
Interest expense
CU1,398
CU1,033
CU569
Amortisation expense
11,000
Total periodic expense
CU12,398
CU12,033
CU11,569
Balance sheet:
ROU asset
CU33,000
CU22,000
CU11,000
CU
Lease liability
CU(33,000)
CU(24,398)
CU(13,431)

28. Response Example Debit Credit At lease commencement ROU asset CU33,000
Lease liability
To initially recognise the ROU asset and lease liability
Year 1 journal entries
Interest expense
CU1,398
To record interest expense and accrete the lease liability using the interest method (CU33,000 x 4.235%)
Amortisation expense
CU11,000
To record amortisation expense on the ROU asset (CU33,000 ÷ 3 years)
CU10,000
Cash
To record lease payment

29. P&L profile Interest Depreciation Straight line
Impact for an individual lease
In the future, this may not have a significant impact where portfolios are maturity on a regular basis each year
Large retailers concerns
During the ED process large retailers pushed against this method
They often have long term contracts – say 20 years – but would typically renegotiate a new lease after 10 years – say for a further 20 years
They were concerned that they would not “enjoy the benefit” of the tail of the lease or create significantly greater volatility
Transition – key issue
If the “simple” modified retrospective approach is taken then this profile will set for the whole portfolio of leases – the impact in early years could be significant
There are benefits to the “alternative” modified retrospective approach or full retrospective approach

30. Impact on financials Impact on balance sheet
Asset
Liability
Impact on balance sheet
Companies with operating leases will appear to be more asset-rich, but also more heavily indebted
Impact on statement of profit and loss
Depreciation
Interest
Cash rental payments
Total lease expense will be front-loaded even when cash rentals are constant

31. Impact on financials ratios
Profit/loss
Balance sheet
Ratios
EBITDA
Total assets
Gearing
EPS
(in early years)
Net assets
Interest cover

32. Lease term
The assessment of the lease term is a critical estimate and a key input to the amount of the lease liability.
The lease term can be defined as :
Particulars
Years
Non-cancellable period
XXX
Optional renewable periods (where lessee is reasonably certain to extend the lease)
Periods covered by option to terminate the lease (where lessee is reasonably certain not to terminate early)
Total Lease terms
XXXX
Lease term begins at the commencement date and include any rent free period.
Termination options held by the lessor are not considered when determining the lease term.

33. Leases of low value items
Exemption
Two optional exemptions make the standard easier to apply
1. Low value assets
2. Short-term leases
Lessees – can use ‘low-value asset’ exemption:
Not to recognise ROU assets or lease liabilities on the balance sheet.
Recognise lease expense on a straight-line basis over the lease term or another systematic basis.
Applies to assets that are not dependent on, or highly interrelated with, other assets
Can be applied on a Lease by Lease basis.
Lessees – can use ‘short-term lease’ exemption
Not to recognise ROU assets or lease liabilities on the balance sheet
Recognise lease expense on a straight-line basis over the lease term or another systematic basis.
Applies to leases with a lease term of 12 months or less
A lease that contains a purchase option does not qualify.
To be applied by class of underlying assets.
Leases of low value items
Short term leases
≤ 12 months

34. Case Study : Low value assets
Lessee B is in the pharmaceutical manufacturing and distribution industry and has the following leases:
Leases of real estate: both office building and warehouse;
Leases of company cars;
Leases of trucks and vans used for delivery; and
Leases of office furniture;
Leases of IT equipment such as laptops.
B determines that the leases of office furniture and laptops are individually of low value.
Whether B can apply the exemption to the leases of furniture and laptops.
Responses:
Yes, B can elects to apply the exemption to these leases i.e. Lease by lease .
As a result, it applies the recognition and measurement requirements in Ind AS 16 to its leases of real estate, company cars, trucks and vans.

35. Exemption
1. Case study:
An entity that has leased several items of office equipment – some for less than 12 months and some for longer than 12 months, with no purchase options. Items of office equipment are all considered to be of the same class.
Can entity avail all the lease exemptions?
Responses:
Yes, the entity can use the short-term lease exemption for all of the leases with terms of 12 months or less.
2. Case study:
A lessee enters into a lease with a nine-month non-cancellable term with an option to extend the lease for four months.
At the lease commencement lessee is reasonably certain to exercise the extension option because the monthly lease payments during the extension period are significantly below market rates.
Can entity avail all the lease exemptions
Responses:
No, The lease term is greater than 12 months i.e. 13 months. Lessee can not account for the lease as a short-term lease.

36. The complex Presentation and disclosure requirements for lessees
Balance sheet
Income statement
Cash flow statement
Disclosures
ROU asset
ROU asset needs to be presented
Separately in BS or
Disclosed in notes separately from other assets (e.g., owned assets) in the corresponding underlying assets and disclose line items in BS containing ROU assets.
Depreciation expense (separate from interest expense) -
Depreciation of ROU assets by class of underlying asset
Lease Liability
Lease liability is presented separately from other liabilities, or together with other liabilities and disclose line items containing lease liabilities
Interest expense (separate from depreciation expense)
Principal payments within financing activities.
Interest payments consistent with policy election in Ind AS 7 Statement of Cash Flows.
Interest on lease liabilities

37. 4
Lessor accounting

38. Lessor accounting - Overview
Lessor accounting remains similar to current practice
Lease classification test is essentially unchanged from Ind AS 17 (5 indicators + 3 additional indicators)
Lease classification test
Ownership transfers at end of lease
Finance leases and operating leases
Purchase option
A lessor classifies a lease as either a finance lease or an operating lease, as follows:
Does the lease transfer substantially all the risks and rewards incidental to ownership of an underlying asset ?
Yes
Finance lease No
Operating lease
Lease for majority of economic life
Minimum lease payments
For a lease of land and buildings in which the amount of the land element is immaterial to the lease, a lessor may treat the land and buildings as a single unit
Lease classification is reassessed only if there is a lease modification
Changes in estimates do not give rise to the reassessment of lease classification
Specialised nature

39. 5
Transition

40. Transition exemption on Lease definition
Apply the new definition to all contracts Or
Apply practical expedients and ‘grandfather’ assessment for existing contracts and apply the new definition only to new contracts.
Practical expedient
This exemption must be applied either for all contracts or none i.e. cherry-picking is not permitted.
This exemption does not mean that previously identified operating leases can remain off-balance sheet for lessee. (unless qualify for a recognition exemption). It merely saves the entity the costs and effort of reassessing.
If the exemption is elected, the new definition of a lease is applied only to contracts entered into or changed on or after initial application.
Disclosure is required if a practical expedient is elected.

41. Transition date – Retrospective Vs Modified approach option
Lessees are permitted to choose between two transition approaches applied consistently to all leases
Full retrospective
Modified retrospective
Retrospective application or modified approach?
Option 1 – Retrospective
Restate comparatives as if Ind AS 116 always applied.
Option 2 – Modified (Do not change comparative FS)
Difference between asset and liability recognised in opening RE at transition date.
Lease liability : Calculate present value of remaining lease payments for existing operating leases using incremental borrowing rate at date of transition.
Choose how to measure ROU asset on lease-by-lease basis:
Option 2A –
Measure asset as if Ind AS 116 had been applied from lease commencement (but using incremental borrowing rate at date of transition)
Option 2B –
Measure asset at amount equal to liability (adjusted for accruals and prepayments)

42. 5
Key Differences

43. Key Differences - Ind AS 116 Vs Ind AS 17
Particulars
Ind AS 116
Ind AS 17
Lease model
Single lease accounting model for Lessee i.e. finance lease.
Dual lease accounting model for Lessee i.e. finance / operating lease.
ROU
Concept of “Right to control the use” has been introduced for Lessee.
Concept of “Right to use” exist.
Initial direct costs for lessors
Added to carrying amount of leased asset and recognised as expense over the lease term.
Recognised as expense in the statement of profit and loss in the period in which incurred.
Lease definition
Control model has been introduced in the lease definition.
No such control model exists.
Lease expense
Lease expenses (interest) will be higher in initial year and will be lower in later years.
Lease rental shall be recognised on straight line basis.

44. Key Differences - IFRS 16 Vs Ind AS 116
Particulars
IFRS 16
Ind AS 116
Interest – operating / Financing
Cash payments for interest portion of lease liability will be classified as operating or financing activity.
No such option is available under Ind AS 116.
Such interest shall be classified as financing activities.
Investment Property
IFRS 16 provides that if lessee applies FV model in IAS 40 to its investment property, it shall apply that FV model to the ROU assets that meet the definition of investment property.
Not applicable as Ind AS 40, does not allow the use of fair value model in investment property.

45. 6
What does it mean for the industry

46. What does it mean for the industry?
What should you consider?
Key questions to consider
Ind AS 116 has the potential to impact many functions across an entity
We outline here some high-level questions that you may ask when beginning to address Ind AS 116
Financial
What impact will 116 have on current business operations and commercial negotiations (e.g., lease vs. buy decisions, sale and lease back transactions, lease negotiation and renewals)?
What is the impact on performance targets and KPIs (e.g., EBITDA, solvency rations)?
Systems and data
Will enterprise resource planning (ERP) systems require reconfiguration to capture all the necessary financial and operational information, including data needed for transition and disclosures?
Is data on leases primarily stored manually?
Will the standard create new book or tax differences?
Organisation
How do your implementation plans compare to those of your competitors?
How and when will you communicate the accounting and wider commercial impacts of Ind AS 116 to internal and external stakeholders?
Transition
Have you prepared for the transition disclosures?
Have you considered how to communicate the transition impact to stakeholders?

47. Thank You!