Ind AS 116 & IFRS 16 — Leases (Clear, Practical Guide with Examples)

Ind AS 116 provides one framework for lease accounting so users can see rights to use assets and obligations to pay for them on the balance sheet (Ind AS 116 Para 1). It applies widely across industries to office space, warehouses, vehicles, equipment and many embedded arrangements, subject to specific scope exclusions (Ind AS 116 Para 3). This guide follows the MCA table of contents and explains each rule in plain language with short examples. Paragraph references are shown in brackets.

Objective

The objective of Ind AS 116 is to provide better lease information by requiring lessees to recognise a right‑of‑use (ROU) asset and a lease liability, and by prescribing how lessors classify and account for finance and operating leases (Ind AS 116 Para 1).

In simple terms: put most leases on the balance sheet for lessees, and classify lessor leases so income and exposure are presented faithfully.

Mini example. A 3‑year equipment lease results in an ROU asset and a lease liability on day one; expense becomes depreciation plus interest instead of straight‑line rent.

Scope

Ind AS 116 applies to all leases, including subleases (Ind AS 116 Para 3).

It does not apply to the following arrangements, which are addressed by other Standards (Ind AS 116 Para 3):

• Rights to explore for or use minerals, oil, natural gas and similar non‑regenerative resources.

• Biological assets related to agricultural activity (see Ind AS 41).

• Service concession arrangements with a grantor.

• Licences of intellectual property when revenue is recognised under Ind AS 115.

• Rights held by a lessee under licensing agreements for items such as films, manuscripts, patents and copyrights (see Ind AS 38).

Note. If a contract is purely a service (no identified asset or no control of its use), it is not a lease. Apply normal revenue and expense guidance instead.

Examples. In scope: a 5‑year warehouse lease or vehicles provided exclusively to you with no substitution rights. Out of scope: a cloud service where the supplier can substitute servers at any time; a distribution licence for a movie.

Recognition Exemptions

A lessee may elect not to recognise an ROU asset and lease liability for short‑term leases (12 months or less, no purchase option) and leases of low‑value assets (Ind AS 116 Para 5).

If these expedients are used, recognise lease payments as expense on a straight‑line or other systematic basis and disclose the accounting policy.

Example. Ten‑month copier lease at ₹30,000 per month → expense ₹30,000 each month; no ROU asset or lease liability.

Identifying a Lease

A contract is, or contains, a lease when it conveys the right to control the use of an identified asset for a period of time in exchange for consideration (Ind AS 116 Para 9). You control use when you obtain substantially all economic benefits from use and you direct how and for what purpose the asset is used.

Example — Lease. An agreement gives exclusive use of warehouse bay #12 for two years. You decide what to store and when. The asset is identified and you direct its use → lease.

Example — Service. You buy computing capacity from a cloud provider that can substitute servers at any time. No identified asset and no ability to direct use → service, not a lease.

Separating Components of a Contract

Contracts often include both lease and non‑lease components (for example, space plus cleaning and security). A lessee separates the lease component from non‑lease components and allocates consideration to each based on stand‑alone prices (Ind AS 116 Para 12).

Practical expedient. A lessee may elect, by class of underlying asset, not to separate non‑lease components and to account for everything as a single lease (this increases the measured lease liability and ROU asset).

Lessor. The lessor also separates lease and non‑lease components and allocates consideration (Ind AS 116 Para 12).

Example. Office rent includes common‑area maintenance. Without the expedient, split the payment between space (lease) and services (non‑lease) using stand‑alone prices.

Lease Term

The lease term is the non‑cancellable period plus periods covered by extension options that you are reasonably certain to exercise and less periods covered by termination options that you are reasonably certain not to exercise (Ind AS 116 Para 18).

Reassess the lease term when significant events or changes in circumstances occur, such as lease‑specific fit‑outs or the signing of major customer contracts for the site (Ind AS 116 Para 20).

Example. Base term 5 years with a 3‑year extension. Significant lease‑specific fit‑out is planned and business plans rely on staying → reasonably certain to extend → lease term is 8 years.

Lessee

Recognition

On the commencement date (when the asset is available for use), recognise a lease liability for the present value of lease payments and a right‑of‑use asset initially measured at the amount of the lease liability, adjusted for prepaid amounts, initial direct costs and restoration obligations, and reduced for lease incentives (Ind AS 116 Para 22).

Measurement

Lease payments included in the liability usually comprise (Ind AS 116 Para 27):

• Fixed payments (including in‑substance fixed), less lease incentives.

• Variable payments that depend on an index or rate (use the index or rate at commencement).

• Amounts payable under residual value guarantees.

• Exercise price of a purchase option if reasonably certain to exercise.

• Termination penalties if the lease term reflects exercising a termination option.

Discount rate. Use the interest rate implicit in the lease if readily determinable; otherwise use the lessee’s incremental borrowing rate (Ind AS 116 Para 26).

Subsequent measurement. Increase the liability by interest, reduce it by lease payments, and remeasure when relevant estimates change (index or rate, lease term, guarantees). Depreciate the ROU asset, usually straight‑line over the lease term, and test for impairment (Ind AS 116 Paras 36–40).

Worked example — three‑year equipment lease with payments in arrears and 8% IBR:

• Initial lease liability (present value of three payments of ₹100,000): approximately ₹257,710.

• ROU asset at commencement: ₹257,710 (assume no other adjustments).

• Depreciation: ₹85,903 per year (straight‑line over 3 years).

• Liability roll‑forward (rounded): Year 1 close ₹178,327; Year 2 close ₹92,593; Year 3 close ₹0.

Compact entries at commencement: Dr Right‑of‑use asset ₹257,710 / Cr Lease liability ₹257,710.

Year‑end 1: Dr Interest expense ₹20,617; Cr Lease liability ₹20,617. Dr Lease liability ₹100,000; Cr Cash ₹100,000. Dr Depreciation expense ₹85,903; Cr Accumulated depreciation—ROU ₹85,903.

Remeasurement triggers (headlines): change in lease term, purchase/termination option assessment, index or rate affecting cash flows, and residual value guarantee expectations (Ind AS 116 Paras 39–43).

Presentation

Present ROU assets within the same line item as the underlying assets (for example, ROU assets—buildings, vehicles, equipment). Present lease liabilities separately from other liabilities or disclose them separately in the notes. In the statement of cash flows, present principal within financing and interest in accordance with your Ind AS 7 policy (Ind AS 116 Para 47).

Disclosure

Provide information that enables users to assess the amount, timing and uncertainty of lease cash flows. Typical items include: depreciation of ROU assets by class; interest on lease liabilities; expense for short‑term and low‑value leases; variable lease expense; total cash outflow for leases; additions to ROU assets and carrying amounts; maturity analysis of lease liabilities; and expedients elected (Ind AS 116 Para 51).

Lessor

Classification of Leases

A lessor classifies each lease as finance or operating. A finance lease transfers substantially all the risks and rewards of ownership to the lessee; an operating lease does not (Ind AS 116 Para 61).

Indicators of a finance lease include the lease term covering a major part of the asset’s economic life, the present value of lease payments being substantially all of the asset’s fair value, the asset being specialised, or the existence of a bargain purchase option (Ind AS 116 Para 67).

Finance Leases

Recognise a net investment in the lease and recognise finance income over the term to produce a constant periodic return (Ind AS 116 Paras 67–76).

Operating Leases

Keep the underlying asset on the balance sheet and recognise lease income on a straight‑line or other systematic basis (Ind AS 116 Paras 81–88).

Lessor Disclosure

Disclose lease income by type, a maturity analysis of lease payments, information about how you manage residual asset risk, and other qualitative details (Ind AS 116 Para 89).

Classification example. A 5‑year equipment lease of a 6‑year life asset with the present value of lease payments at about 95% of fair value is normally a finance lease.

Sale and Leaseback Transactions

First, assess under Ind AS 115 whether the transfer of the asset is a sale (Ind AS 116 Para 99). If it is a sale, recognise only the portion of gain that relates to the rights transferred, recognise an ROU asset for the rights retained and a lease liability for the leaseback. If it is not a sale, treat the transaction as financing: keep the asset and recognise a financial liability (Ind AS 116 Paras 100–103).

Example. Book value ₹10m; fair value ₹12m. You sell and lease back the full asset for five years, retaining rights equivalent to 40 percent of remaining use. Recognise only 60 percent of the gain: ₹2m × 60% = ₹1.2m. Set up an ROU asset for retained rights and a lease liability for the leaseback.

Temporary Exception — Interest Rate Benchmark Reform

If lease cash flows change solely because of reform of an interest rate benchmark, apply the practical expedient: remeasure the lease liability using a revised discount rate that reflects the new benchmark, without treating it as a lease modification that creates a new lease (Ind AS 116 Para 104). Disclose the expedient used.

Month‑End Checklist (Practical)

• Lease vs service documented (identified asset and control of use) (Ind AS 116 Para 9).

• Components separated or expedient elected; policy applied consistently (Ind AS 116 Para 12).

• Lease term judgments documented; reassess when facts change (Ind AS 116 Paras 18–20).

• Payments included correctly; discount rate basis supported (implicit vs IBR) (Ind AS 116 Paras 26–27).

• Remeasurement triggers monitored and processed (Ind AS 116 Paras 39–43).

• Presentation and disclosures prepared (Ind AS 116 Paras 47 and 51; Ind AS 116 Para 89 for lessors).

Variable Lease Payments

What goes into the lease liability. Include fixed payments (including in‑substance fixed) and variable payments that depend on an index or rate, measured using the index or rate at commencement (Ind AS 116 Para 27). Do not include variable payments that depend on usage or performance; expense those as incurred (Ind AS 116 Paras 38–39).

Scenario 1 — Index‑linked rent (included in liability). Base rent ₹10,00,000 per year linked to CPI; CPI at commencement = 100. Measure the liability using ₹10,00,000. When CPI resets (say to 105), remeasure the remaining payments to ₹10,50,000 using the original discount rate unless a floating interest rate changes (Ind AS 116 Paras 39–42). Adjust the ROU asset.

Scenario 2 — Turnover rent (expense as incurred). Base rent ₹8,00,000 + 2% of monthly sales. Only the base rent is included in the liability. The 2% turnover portion is recognised in profit or loss when incurred.

Scenario 3 — Usage‑based vehicle lease (expense as incurred). ₹30 per kilometre variable charge. Exclude from liability. Recognise mileage charges in profit or loss monthly.

Mini journal entry on an index reset: Dr Right‑of‑use asset / Cr Lease liability (for the increase caused by the CPI jump).

Lease Modifications — Lessee

A modification is a change in scope or consideration that was not part of the original terms (Ind AS 116 Para 44). Decide first whether it is a separate lease.

Separate lease. Treat as a separate lease if the modification adds the right to use one or more underlying assets and the consideration increases by an amount commensurate with the stand‑alone price at the date of modification (Ind AS 116 Para 44).

Not separate. Otherwise, remeasure the existing lease using a revised discount rate on the effective date and adjust the right‑of‑use asset (Ind AS 116 Para 45).

Worked example — extend term at market. Original: 3‑year lease, payments ₹1,00,000 at each year‑end, IBR 8%. At end of Year 2, you add 2 years at a market rent of ₹1,05,000 and the pricing is commensurate with stand‑alone price.

If separate lease. Measure a new lease for the 2 extra years. Present value at 9% (assume new IBR): PV ≈ ₹1,05,000/1.09 + ₹1,05,000/1.09² = ₹1,84,719. Journal entry on modification date: Dr Right‑of‑use asset ₹1,84,719 / Cr Lease liability ₹1,84,719.

If not separate (extend existing). Remeasure the remaining three payments (₹1,00,000; ₹1,05,000; ₹1,05,000) at 9%: PV ≈ ₹2,61,121. If the carrying lease liability just before modification is ₹92,593, increase needed = ₹1,68,528 → Dr Right‑of‑use asset ₹1,68,528 / Cr Lease liability ₹1,68,528.

Partial termination (reduce scope). If you reduce floor area by 30% from Year 3, decrease the carrying amount of the right‑of‑use asset and lease liability proportionately and recognise any difference in profit or loss immediately (Ind AS 116 Para 46).

Subleases — Intermediate Lessor (Ind AS 116 application guidance)

An intermediate lessor classifies a sublease by reference to the right‑of‑use asset in the head lease, not the underlying asset’s total life (Ind AS 116 Para 61 with application guidance).

Example. Head lease: 5‑year office space (lessee accounting on your books). Sublease to a tenant for 4 years starting now. Relative to your right‑of‑use asset (5 years), the sublease term (4 years) is a major part → finance sublease. Derecognise the portion of your ROU asset that is subleased, recognise a net investment in the sublease (present value of sublease payments), and continue to carry the head lease liability.

Sale and Leaseback — Proportionate Gain

Step 1. Assess under Ind AS 115 whether the transfer is a sale {see our recognition guide on control transfer (Ind AS 115) for the test } (Ind AS 116 Para 99). Step 2. If it is a sale, recognise only the gain related to the rights transferred; recognise a right‑of‑use asset for the rights retained and a lease liability for the leaseback (Ind AS 116 Paras 100–103). If it is not a sale, treat as financing.

Worked example. Carrying amount ₹10,000,000; fair value ₹12,000,000. Leaseback payments have a present value equal to 40% of fair value. Rights transferred = 60%. Total gain = ₹2,000,000; recognise 60% × ₹2,000,000 = ₹1,200,000. Set up an ROU asset for 40% retained rights and a lease liability for the leaseback.

Initial Direct Costs, Incentives and Impairment

Initial direct costs. Add to the right‑of‑use asset at commencement (Ind AS 116 Para 24).

Lease incentives. Reduce the measured lease payments or adjust the right‑of‑use asset as appropriate; incentives reduce the lease liability/ROU balance.

Impairment. Test the right‑of‑use asset for impairment under Ind AS 36 when there are indicators (Ind AS 116 Paras 36–40). Recognise loss in profit or loss and adjust future depreciation.

Transition Cheat‑Sheet (First‑time Adoption)

Methods. Full retrospective — restate comparatives; Modified retrospective — do not restate, adjust opening equity and recognise the ROU at either (i) as if Ind AS 116 always applied, or (ii) an amount equal to the lease liability (with adjustments).

Practical expedients. Treat short‑term and low‑value leases as expense; use a single discount rate for a portfolio with similar characteristics; apply hindsight for options when measuring the ROU on transition; optionally do not reassess whether existing contracts are leases if elected.

Lessee Disclosure — Template Snippets (Ind AS 116 Para 51)

One‑paragraph note example. “ROU assets—buildings ₹620m (additions ₹140m, depreciation ₹110m); vehicles ₹75m (additions ₹20m, depreciation ₹18m). Interest on lease liabilities ₹42m. Expense—short‑term ₹8m; low‑value ₹3m; variable ₹5m. Total cash outflow for leases ₹165m.”

Maturity analysis (undiscounted). < 1 year ₹120m; 1–2 years ₹110m; 2–5 years ₹230m; > 5 years ₹90m.

Industry Deep‑Dives — Three Practical Scenarios

Retail (store with turnover rent and fit‑out). A retailer leases a high‑street store: base ₹12,00,000 per year plus 1.5% of sales; landlord provides a ₹10,00,000 fit‑out incentive. Include only the base rent in the lease liability (Ind AS 116 Para 27). Recognise the 1.5% turnover rent in profit or loss when incurred. Reduce the ROU/lease liability for the incentive. If the retailer signs a 5‑year concession agreement tied to the location, extension may be reasonably certain — support the lease‑term judgement (Ind AS 116 Paras 18–20).

Manufacturing (equipment lease with modification). A manufacturer leases a machine for 3 years and later adds a second identical machine at stand‑alone price. Treat the addition as a separate lease (Ind AS 116 Para 44). If, instead, the price is a concession and not commensurate, remeasure the original lease with a revised discount rate and adjust the ROU asset (Ind AS 116 Para 45).

Logistics (vehicle fleet with usage charges). A logistics company leases trucks with ₹40,000 per month per vehicle plus ₹25 per kilometre. Include ₹40,000 in the liability; expense the ₹25 per kilometre as incurred (Ind AS 116 Paras 27, 38–39). If fuel and maintenance are bundled, separate non‑lease components unless the expedient is elected (Ind AS 116 Para 12).

Technology Integration — System & Data Requirements

Core data to capture. Contract ID; identified asset; lease term assumptions and option assessments; payment schedule with fixed/variable splits; index/rate type and reset frequency; discount rate (implicit vs IBR) and support; initial direct costs; incentives; restoration obligations; component splits; modification history.

System capabilities. Present‑value calculations; amortisation schedules; remeasurement engine for index/rate changes and scope/price modifications; disclosure pack (maturity analysis, short‑term/low‑value/variable expenses); audit trail; role‑based controls and workflow for approvals.

Controls. Lease inception checklist; periodic option re‑assessment; CPI/floating‑rate monitoring; tie‑outs to GL; impairment triggers; disclosure review.

Common Pitfalls and Solutions

Pitfall — treating service bundles as leases, or leases as services. Solution: document identified asset and control of use (Ind AS 116 Para 9); if supplier can substitute the asset without substantive costs, it is usually a service.

Pitfall — putting usage‑based variable payments into the liability. Solution: expense as incurred; only index‑ or rate‑linked variables go into the liability (Ind AS 116 Para 27).

Pitfall — missing remeasurement on CPI resets or option changes. Solution: calendar‑based reviews; trigger‑based remeasurement with revised discount rate when required (Ind AS 116 Paras 39–43).

Pitfall — incorrect sublease classification. Solution: classify by reference to the right‑of‑use asset, not the underlying asset’s total life (application guidance to Ind AS 116).

Pitfall — weak lease‑term support. Solution: write a short memo for “reasonably certain” conclusions and revisit when facts change (Ind AS 116 Paras 18–20).

Comparative Analysis — Ind AS 116 vs Ind AS 17 (Impact Overview)

Balance sheet. Ind AS 116 brings most lessee leases on‑balance sheet via the right‑of‑use asset and lease liability; under Ind AS 17, operating leases were off‑balance sheet for lessees.

Profit and loss. Under Ind AS 116, lease expense splits into depreciation and interest (front‑loaded profile). Under Ind AS 17, operating lease expense was straight‑line rent.

Cash flows. Total cash outflow is unchanged, but classification shifts: principal in financing; interest as per Ind AS 7 policy. Under Ind AS 17, all operating lease cash flows were in operating activities.

Metrics. EBITDA typically increases (rent removed), operating profit changes, and leverage ratios rise due to recognised lease liabilities. Analysts should adjust for comparability across periods.

Ind AS 116 vs IFRS 16 — Key Differences

Bottom line: The core lease model is the same. Two India-specific tweaks remain:

1. Investment property (lessee) — no fair-value option under Ind AS.
   IFRS 16 lets a lessee measure a right-of-use (ROU) asset at fair value if it meets the IAS 40 investment-property definition. Ind AS 116 deletes this option because Ind AS 40 does not permit the fair-value model.
2. Cash-flow classification of interest — fixed under Ind AS.
   IFRS 16 points to IAS 7 (policy choice: interest paid as operating or financing). Ind AS 116/Ind AS 7 require interest paid (for non-financial entities) to be presented as financing cash flows; interest/dividends received as investing.

Everything else (recognition, measurement, presentation, disclosures) is substantively converged.

Conclusion

Ind AS 116 brings leases onto the balance sheet and makes judgements visible. For lessees, that means recognising a right-of-use asset and a lease liability, splitting expense into depreciation and interest, and documenting calls on lease term, discount rate and remeasurement triggers (Ind AS 116 Para 1, 18–20, 26, 39–43).
If you keep a tight handle on components, variable payments, modifications and disclosures—and support each judgement with short memos—your numbers will be consistent, auditable and comparable across periods. For lessors, the familiar finance vs operating model continues, backed by clearer disclosures (Ind AS 116 Para 61, 89).

FAQ — Ind AS 116

Disclaimer

This material is for general information only and is not professional advice. Outcomes under Ind AS 116 depend on specific facts and contract terms—please consult a qualified adviser before acting. While care has been taken, no warranty is given and no liability accepted. If there is any inconsistency, the MCA-notified Ind AS 116 text prevails. Examples are simplified.

Sources & References

1. Ind AS 116 — Leases (MCA-notified).
2. ICAI Educational Material on Ind AS 116 (guidance, FAQs and illustrations).