Blog
Ind AS 116 Accounting: Step-by-Step Guide to Journal Entries & Disclosures
Welcome back! This is the second part of our lease accounting guide on Ind AS 116. If you’re new to the topic, catch up on first part to get a solid grasp of the foundations of Ind AS 116.
IND AS 116: Lease Accounting in India
Once you’ve identified a lease and determined the lease term and payments, the next big step as per Ind AS guide is to understand how to account for it in your books.
We’ll look at how lease accounting in India works for both lessees and lessors.
1) In the Books of the Lessee
A. Initial Recognition
Under Ind AS 116, lessees need to recognise two key things on their balance sheet from the commencement date of the lease:
1. Right-of-Use (ROU) Asset: This is the asset in the lease contract. It is recorded at the present value (PV) of future lease payments plus upfront costs, already made lease payment and dismantling expenses.
2. Lease Liability: This is the value of lease payments the lessee is obligated to pay over the lease period at the inception date. It’s worked out using either the internal rate of return (IRR) or the incremental borrowing rate (IBR).
Ind AS 116 journal entry:
ROU Asset……………………………………….……………….Dr.
To Lease Liability.…………..………….………………………Cr.
To Bank Account (upfront cost)……………………………….Cr.
To Dismantling Cost Provision…………………………….…Cr.
B. Subsequent Recognition
After initial recording, we need to learn to treat it each year as follow:
1. ROU Asset: It stays in the books using either cost or revaluation model (Ind AS 16). ROU asset depreciation is levied on SLM over lease term, unless the lessee plans to buy the asset. Then, it is depreciated over how long the asset is expected to last. Impairment (Ind AS 36) is also tested.
2. Lease Liability: It is a liability balance. After an accounting period, we have to accrue interest and make payment normally as per the lease contract.
C. Reassessment of Lease Liability
Things don’t go exactly as planned and leases are no different. When this happens, the lessee needs to update the lease liability in their books to reflect the new situation. This update is called a reassessment.
Situations like:
- Lease period changes.
- Lessee changes their mind about buying the asset at the end of the lease.
- Lease payments change because of inflation.
- Change in residual value guarantee.
In such cases, the lease liability is remeasured using the updated terms and change is reflected by adjusting both the right-of-use asset and lease liability, either upward (+) or downward (-).
D. Modification in Lease Contract
Lease contracts are not always set in stone. Over time, businesses grow, downsize, restructure and lease terms change too.
Lease Modification means any change to the original lease agreement that wasn’t planned at the beginning like adding or removing an asset, changing how long the lease lasts or changing the rights to use the asset.
1. Separate Lease?
According to Ind-AS 116, when a lease is modified in a way that gives the lessee access to extra assets and the additional payments are in line with what those assets would typically cost on their own, the modification is treated as a distinct & separate lease.
2. Not a Separate Lease?
If the modification doesn’t qualify as a separate lease, then you must recalculate the lease liability and adjust ROU asset as we discussed in reassessment of lease liability.
Difference: Reassessment Vs Modification in Contract
| Particulars | Reassessment | Modification |
| What Changes? | Lessee’s Estimates/Expectations | Lease Contract Terms |
| Trigger Event | Internal decision or external index rate | Formal amendment/renegotiation |
| Revised Discount Rate? | No, except for changes in lease term/purchase options | Yes, unless treated as a separate lease. |
| Separate Lease Created? | No | Yes, if scope increases. |
- Let’s say a company, Blogic Pvt Ltd rents an office space for 5 years. After 2 years, they add 4,500 sq. ft. more for the remaining 3 years and rent increase by ₹ 3 lacs.
This counts as a separate lease because it adds extra space and the rent increase is reasonable for what’s being added.
But if they just change the rent on the original space due to market conditions, it is a modification of the existing lease, not a new one.
2) In the Books of the Lessor
Unlike lessees, lessors under Ind AS 116 are not required to bring leases onto their balance sheet in the same way. Instead, they keep classifying leases as either finance leases or operating leases.
A. Classification of Leases by the Lessor
A lessor must classify the lease at the lease inception date.
Finance Lease Vs Operating Lease
1. Finance Lease is lease if the lessee gets all risks and benefits associated with asset’s ownership.
Signs of a finance lease:
- Ownership transfer at the lease end.
- Lease term cover maximum asset’s useful life.
- The total lease payments are close to the asset’s cost.
- Asset is only useful to lessee.
- Lease can’t be cancelled easily and the lessee bears the loss if it is.
2. Operating Lease is the lease that does not fall in any above situations.
B. Initial Recognition
Accounting treatment in finance lease:
- Derecognise the asset from books.
- Recognise a lease receivable equal to the net present value of (lease payments + unguaranteed residual value).
Ind AS 116 journal entry:
Lease Receivable (Net Investment)…………………..Dr
To Asset (PPE)……………………………..…………..Cr
Accounting treatment in operating lease:
Since the asset’s ownership is still with lessor, so it will not be derecognised from books. We just need to record the rent received on accrual basis.
C. Subsequent Recognition
Each year, record interest income using the IRR over lease term and reduce lease receivable as payments come in. This income goes to profit and loss account.
D. Modification
Use the same modification principles to classify as we discussed in D part of 7.1. In case of finance lease, we have to follow the Ind AS 109 for the treatment of the modification if it is not a separate lease. For operating leases, the lessor will record this as a new lease from the date of this change.
3) Are You a Manufacturer and Lessor too?
If you are a manufacturer or dealer and you enter into a finance lease, the accounting is a different. In addition to recognizing a lease receivable and finance income, you should recognize a selling profit or loss at the lease commencement date. It is a sales transaction.
“Profit = Fair Value of Asset (-) Carrying Value of Asset”
4) Indian Accounting Standard 116 Disclosures
For lessees, the main disclosure is showing the right-of-use asset and lease liability on the balance sheet, along with details on related expenses, cash flows and a schedule of future payments.
For lessors, disclosures focus on classifying leases as finance or operating, maturity analysis of receivable, reconciliation of the net investment and providing information about risks tied to the leased assets.
5) How Master Brains Can Help with Ind AS Consultancy Services
For many businesses, Ind AS 116 raises more questions than answers. Master Brains makes a real difference with practical advice, clear processes and experienced professionals who understand what works in real-world situations.
What We Offer
- Clean conversion from AS to Ind AS: We can transform your financial statements from the old AS to the new Ind AS and even prepare new, compliant statements from scratch with Ind AS implementation.
- Full financial statement preparation: We prepare complete Ind AS-compliant financial statement, standalone and consolidated, ready for audit, submission and internal review.
- Expert Review: We review your disclosures, treatments and formats to make sure they meet every Ind AS and Schedule III requirement.
- Ind AS Advisory: Our Ind AS Advisory Services is focused on the correct accounting treatment for challenging transactions under Ind AS, avoiding future issues.
- NFRA & Regulatory Support: We help companies respond to NFRA and regulatory queries with detailed documentation and representation.
Ready to Take Control of Your Lease Accounting & Ind AS 116 Compliance in India?
With Master Brains’ Ind AS Advisory, you get standards-driven clarity and confidence in every number.
No matter whether you are first time adopting Ind AS or preparing your Ind AS balance sheet for the 20th time or need restatement of financial statements for IPO……we are here to support you through the process end to end.
Call us: +91-8595867402
Email us: masterbrains.office@gmail.com
Let’s Connect: Contact Us – Masterbrains
Partner with Ind AS Experts.
Team Master Brains
0
