Commercial lease management software significantly varies in both the quality and the functionality of its features and capabilities. If we’re investing in software to help manage property, plant, or equipment leases, then we need to be aware of the features and capabilities required to manage the complexity of lease portfolios effectively.
1. Commercial lease management software integrates with the rest of the accounting ecosystem
The objective of Ind AS 116
The lease agreement is a contractual agreement by which one lends his property, land, etc to another for a specific period of time in return for payment. As huge financial transactions are involved between the parties, the government decided to make the lease contracts more transparent and progressive. Hence in 2019, the government of India established Indian Accounting Standards [Ind AS] 116. The objective of Ind AS 116 is to monitor the transactions between lessee and lessor and ensure that they provide relevant information about property details and transparency in transactions. IND AS 116 is an updated version of Ind AS 17.
Exceptions of Ind AS 116
Though IND AS 116 is applicable to all the leases and subleases, there are some exceptional cases, and IND AS 116 is not applicable for those scenarios.
● Leases to explore or use non-regenerative resources like coal, oil, natural gas, etc.
● Leases of holding biological assets by the lessee (Covered under Ind AS 41).
● Service concession agreements (Covered under Ind AS 115).
● Licences of intellectual property granted by the lessor (Covered under Ind AS 41).
● Licensing agreements of intangible assets such as video recordings, plays, motion pictures, patents, and copyrights held by the lessee (Covered under Ind AS 38).
The distinction between Ind AS 116 and Ind AS 17
Ind AS 116 is a revised version of Ind AS 17 in order to create the fundamental standards for lease identification, measurement, representation, and disclosure. Leases are classed as financing leases or operating leases under Ind AS 17. This distinction is not made in Ind AS 116. In contrast to Ind AS 17, Ind AS 116 mandates detailed disclosure for lessees. In contrast to Ind AS 17, Ind AS 116 includes detailed provisions for lease modification for both the lessor and the lessee. Similarly, Ind AS 116 provides more disclosure requirements for lessors than Ind AS 17.
Lessor’s accounting model
According to Ind AS 17, the lessor must divide leases into two categories namely operating leases and finance leases. Under an Operating Lease, lessors may choose to recognize lease revenue on the basis of use-related benefits. Lessors derecognize the underlying asset under a finance lease and record a profit or loss as a result. To offset this, Lessor records assets held under financing leases as receivables in their balance sheets with a value equivalent to the net investment in the lease. On such net investment in the lease, the lessor subsequently recognizes interest income and deducts the investment for payments received from the lessee. The new standard requires lessors to adhere to the same recognition and measurement principles, with the exception of the requirement to recognize lease income on a straight-line basis or another systematic basis that is more representative regardless of whether payments to the lessor are structured to increase in accordance with expected general inflation.
Lessee’s accounting model
And AS 116 requires a lessee to recognize assets and liabilities for any leases with terms of more than 12 months, unless the asset is of lesser value. A lessee must record a right-of-use asset that represents its right to use the underlying leased asset, as well as a lease liability that represents its responsibility to make lease payments. Leases must be classified as finance leases or operational leases under Ind AS 17, but this is not needed under Ind AS 116. According to Ind AS 116, a lessee measures right-of-use assets in the same way that other non-financial assets (such as property, plant, and equipment) are measured, and lease liabilities in the same way that other financial liabilities are measured. As a result, a lessee recognizes depreciation of the right-of-use asset and interest on the lease liability, as well as classifies cash lease liability repayments into a principal portion and an interest portion and presents them in the statement of the flow of cash using Ind AS 17, Statement of the flow of cash. Under Ind AS 17, lessees are required to recognize lease payments as an expense on a straight-line basis for operating leases unless another systematic method is representative of the time pattern of the user's benefit.
Covid’s effect on Ind AS 116
Indian Accounting Standards Amendment Rules, 2020 were published in a notification by the Corporate Affairs Ministry on July 24, 2020. These regulations include incorporated updates to Ind AS 116. The change made by the top body of chartered accountants, ICAI, took the COVID-19 pandemic into consideration, and lessees were given the option of classifying a rent reduction that occurred as a direct result of the epidemic as a lease modification or not.
Exemptions under Ind AS 116
The government provides exemptions to leases if it comes under any one of the below two categories,
● Short term lease
● Low-value assets
Lessees are given optional exemptions under Ind AS 116 for certain short-term leases. A short-term lease is one with a lease term of 12 months or less at the time of signing the agreement. A purchase option cannot be included in a short-term lease. Lessees must include interest for expenditure on the lease liability and depreciation on the right-of-use asset in their profit and loss statements.
Accounting for short-term and low-value assets
If a lessee chooses the recognition exemption for either short-term leases or leases with a low-value underlying asset, the lessee must recognize the lease payments as an expense on a straight-line basis over the lease duration or another systematic manner.
Frequently asked questions:
Is Ind AS 116 mandatory?
Ind AS 116 is mandatory for all leases, including subleases and leases of right-of-use assets. However, there are some exclusions, and Ind AS 116 does not apply to the following contracts: Mineral leases, natural gas leases, oil leases, and other non-renewable resource leases
What is an operational lease?
An operating lease is a contract in which the owner, known as the Lessor, allows the user, known as the Lessee, to use an asset for a period of time that is less than the asset's economic life without transferring ownership.
What is a finance lease?
A financial lease is one that transfers substantially all of the risks and rewards associated with ownership. An operating lease is one that does not transfer virtually all of the risks and rewards associated with ownership.