Lease accounting: Operating & Financial Lease distinction set to go from financial year 2019-20

The Accounting standards Board of ICAI, in line with the adopting IFRS for Indian accounting framework, has taken one more step ahead in this direction with the release of the exposure draft[1] on IND AS 116 – Leases. What the said exposure draft has to offer for the leasing industry has been discussed as under:

Effective date

It is proposed that IND AS 116 will be effective for the annual periods beginning on or after 1st April, 2019.

Major changes introduced by IND AS – 116

Introduction of single lessee accounting model

Where the term of lease is more than 12 months, the lessee is required to recognize assets and liabilities for such leases provided the underlying asset is not of low value. Lessee should record a right-of-use asset that represents its right to use the underlying leased asset and a corresponding lease liability which represents its obligation to make lease payments.

Accounting treatment in the hands of lessee

In respect of assets acquired on lease (i.e. right-of-use assets), the lessee should record the same in the manner in which other non-financial assets (i.e. property, plant and equipment). Hence the lessee books the depreciation of the leased assets in its books of accounts.

Lease liabilities are recorded in a manner similar to that of financial liabilities. Hence lessee recognizes the interest on the lease liability. The cash repayments towards the lease liability is classified into principal and interest portion and is presented in the statement of cash flows in line with the requirement of IND AS 7 – Statement of Cash flows.

As per erstwhile IND AS 17, in respect of operating leases, lessee was required to recognize the lease payment as an expense on a straight line basis, unless another systematic basis is representative of the time pattern of the user’s benefit. The same has been done away with. Hence the distinction between operating lease and financial lease is done away with for lessee.

Accounting treatment in the hands of lessor

Under IND AS 116, accounting requirements for a lessor are similar to that as required under IND AS 17. The lessor is required to classify its leases either into operating or financial lease and the same need to be accounted for accordingly.

Provision for lease modification

IND AS 116 lays down specific provision for lease modification (i.e. any change in the scope of lease or the consideration for lease which was not a part of the original terms and conditions) for lessor and lessee where as IND AS 17 did not dealt with the same.

Detailed disclosure requirement

Disclosure requirements under IND AS 116 is more detailed both for lessor and lessee, as compared to that of IND AS 17.

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For a detailed discussion on IFRS 16 Leases please see our write up here –


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