Lease Accounting in India_ A Complete Guide to Ind AS 116

1. Lease Accounting in India: A Complete Guide to Ind AS 116 Introduction The financial reporting landscape has been transformed with the introduction of lease accounting in India under Ind AS 116. This standard replaces the earlier Ind AS 17 and requires companies to recognize almost all leases on their balance sheets. For businesses in real estate, aviation, retail, or manufacturing, understanding the principles of lease accounting in India is essential for both compliance and better financial decision-making. What Is Lease Accounting in India? Lease accounting in India refers to the process of recording and reporting lease agreements in line with Ind AS 116 – Leases. The standard makes it mandatory for lessees to recognize: ● Right-of-Use (ROU) Assets – showing the company’s right to use the leased property or equipment. ● Lease Liabilities – representing the obligation to make future lease payments. By doing this, lease accounting in India eliminates the off-balance-sheet treatment that was common under the earlier Ind AS 17.

2. Key Features of Lease Accounting in India under Ind AS 116 1. Balance Sheet Recognition Almost all leases are recognized on the balance sheet as both an asset and a liability. 2. Expense Classification In lease accounting in India, lease expenses are now split into depreciation (for ROU assets) and interest (on lease liabilities), instead of being shown as a single lease expense. 3. Lease Term Determination The lease term includes non-cancellable periods, plus extensions if it is “reasonably certain” that the lessee will use them. 4. Discount Rate Application Companies must calculate lease liabilities using either the implicit interest rate in the lease or the incremental borrowing rate in India. 5. Exemptions Lease accounting in India allows exemptions for short-term leases (less than 12 months) and low-value leases, which can be expensed directly. Impact of Lease Accounting in India The adoption of lease accounting in India under Ind AS 116 brings significant changes for companies: ● Improved Transparency: All major leases appear on the balance sheet, giving stakeholders a clearer financial picture. ● Impact on Financial Ratios: EBITDA rises as lease costs are separated into depreciation and interest, but leverage ratios may change. ● Industry Effects: Sectors like airlines, logistics, and retail—where leases are common—face the largest impact. ● Compliance and Disclosure: Detailed reporting is required, including cash flow effects, maturity analysis, and explanations of lease terms. Lease Accounting in India vs. Old Standards

3. The introduction of Ind AS 116 has completely changed the way companies manage lease accounting in India. Under the old framework (Ind AS 17), leases were categorized as either finance leases or operating leases. While finance leases were reflected on the balance sheet, operating leases were treated as off-balance-sheet items, making it difficult for stakeholders to assess the full extent of a company’s obligations. With Ind AS 116, the approach has shifted to a single, unified model. Almost all leases are now recognized on the balance sheet, providing a much clearer picture of a company’s financial health. Here’s how the two standards differ: 1. Lease Recognition ● Ind AS 17 (Old): Operating leases were kept off the balance sheet, creating gaps in reporting. ● Ind AS 116 (New): All significant leases must be recognized on the balance sheet as both Right-of-Use (ROU) assets and lease liabilities. 2. Expense Recognition ● Ind AS 17 (Old): Lease payments were treated as a straight-line expense, reducing transparency. ● Ind AS 116 (New): Lease costs are now divided into depreciation (on the ROU asset) and interest (on the lease liability), improving accuracy in financial reporting. 3. Transparency ● Ind AS 17 (Old): Limited visibility into a company’s long-term lease commitments. ● Ind AS 116 (New): High transparency, as lease obligations are visible to investors, auditors, and regulators. 4. Impact on EBITDA ● Ind AS 17 (Old): Operating lease expenses reduced EBITDA, often underestimating performance. ● Ind AS 116 (New): Since lease expenses are split into depreciation and interest, EBITDA is typically higher, giving a more favorable view of operating performance. Why This Change Matters

4. The shift from Ind AS 17 to Ind AS 116 is a major milestone for lease accounting in India. Companies now provide stakeholders with a more realistic picture of their financial commitments. For industries like aviation, retail, logistics, and manufacturing—where leasing is a critical part of operations—this shift greatly influences reported profits, debt ratios, and investment decisions. Conclusion Lease accounting in India under Ind AS 116 has redefined how companies report their leases. By recognizing ROU assets and lease liabilities on the balance sheet, businesses provide a more accurate view of their financial commitments. Beyond compliance, lease accounting in India equips organizations with tools for better decision-making, financial planning, and long-term strategy.