The Ministry of Corporate Affairs - MCA states,"The Indian
Accounting Standards (Ind AS), as notified under section 133 of
the Companies Act 2013,have been formulated keeping the Indian economic & legal
environment in view and with a view to converging with IFRS Standards , as issued
by and copyright of which is held by the IFRS Foundation."
The Standardised policies and regulations set under the AS for the Indian
companies guarantee similar accounting procedures across the nation. The purpose
of the Indian Accounting Standards is to govern the accounting of financial
transactions in India. The norms established under the IND AS ensure
transparency, reliability, and the honesty of financial transactions. These
norms apply to every aspect of the entities' financial reports, containing
assets, liabilities, revenue, and expenses. Indian accounting standards also
converge with the IFRS-International Finance Reporting Standards, enabling
global recognition of financial statements. These standards also facilitate the
cross-border flow of money, which benefits the stakeholders to operate
efficiently worldwide. Many accounting standards like Ind AS 1, Ind AS 2, Ind AS
116, Ind AS 17, and so forth, introduced by the Central Government of India,
majorly protect the financial boundaries across the country.
All about the IND AS 116
The IND AS 116 standard came into effect in April in the year, 2019. This accounting
standard is specifically for leases. In this standard, the lessee accounting process
had changed from the previous standards while the lessor accounting process remained
the same. Lessee refers to the person paying rent to the property, whereas the
lessor is the asset owner. IND AS 116 has many procedures for both listed and
unlisted companies to comply with the Accounting Standards.
The Main Objective:
To ensure that the stakeholders provide relevant and genuine information regarding
the lease and the transactions involved.
The definition of a lease under AS 116:
The Ministry of Corporate Affairs defines a lease as a contract that enables one
person to use an asset owned by another person for a stipulated period in exchange
for some consideration.
The recognized exemptions are the leases that do not require the application of this
particular accounting standard. In other words, these leases need not adhere to the
conditions beneath the IND AS 116. The Ministry of Corporate affairs deemed the
Short-term leases and low-value assets containing leases to be the 'recognised
exemptions' under this accounting standard. The short term refers to a period below
12 months. The finance related to these leases is considered an expense and included
on other systematic grounds. The assets under the recognition exemptions are
included on other grounds that benefit the stakeholders.
Lessee Accounting Process
The requirements and procedures released under the IND AS 116 proposed substantial
changes to the Lessee accounting, whereas the lessor accounting process more or less
remained the same. Previously, the lessee accounting had to distinguish between the
operating and finance leases. Financial leases are needed to be recorded in a
balance sheet, whereas operating leases don't need recording. In IND AS 116 system,
the lessee needs to recognize the cost to the Right of Use Assets and the
corresponding lease liability in the balance sheet. The levy to the Right of Use
assets includes the value of lease liability, incentives received for the lease, and
the finances related to the management of assets. The lease liability measured on
the commencement date is the payments involved during the lease term that are yet to
be made. The MCA has provided norms to calculate the 'cost of Right of Use Asset'
under this accounting standard. After measuring the costs involved accordingly, they
disclose them in notes with the balance sheet, statement of profit and loss, and
statement of cash flows.
Lessor Accounting Process
Under the 116 accounting standard, the property owners classify the leases as either
operating or finance leases.
If any lease transfers the risks, rewards, and ownership at the end of the lease
period, it is a finance lease. A finance lease is where the lease period takes up
most of the property's life. Also, if the lease payments made subsequently add up to
the market rate of the property, such leases are again financed leases. In addition,
if the lessee has the option to buy the property at a price less than the fair
value, it is also a finance lease. Furthermore, if the lessee compensates for
cancelling the lease and bears the cost related to cancellation, it comes under a
The lessor calculates the net investment for the assets in its balance sheet. For
calculating the same, the lessor shall use the interest rate implicit that already
includes the initial direct costs. The interest rate implicit, in other words, is
the interest rate set by the user in lease agreements. Moreover, the fixed payments,
variable lease payments, the asset's price if the lessee opts to buy the property,
and the penalties associated with cancellation should also be incorporated while
calculating the net value.
Conversely, if any lease doesn't transfer the risks, rewards, and ownership at the
end of the lease period, it is an operating lease. The costs incurred related to the
leases can be considered an expense. Other standardised systems are applied to these
leases to benefit the lessor.
Both the operating and finance leases are presented in a balance sheet accordingly.
The net investment value, selling profit or loss, and lease income are to be
disclosed in notes with the balance sheet, profit-loss statements, and cash flow
statements. Further, the lessor shall explain the significant changes made to lease
terms. The lessor should also disclose the amount he receives for the asset
annually. It applies to operating leases as well as finance leases.
Hence, the lessor will have to undergo the measurement, presentation, and disclosure
processes while applying for the IND AS 116. The Ministry of Corporate Affairs
equips a comprehensive guide to each procedure listed above.
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