WEBINAR ON IND AS 116: NO MORE OFF-BALANCE SHEET TREATMENT OF LEASES

Lessees were hitherto required to screen and distinguished each of the lease arrangements as either an operating (off balance sheet) or finance lease (on balance sheet). Ind AS 116 requires lessees to recognise a ‘right-of-use asset’ and a ‘lease liability’ for almost all of the leasing arrangements.

There are optional exemptions for leases of terms less than 12 months and low-value assets. These do not have to be recognised on the balance sheet but can continue to be accounted as an operating lease similar to today. The new model will gross-up balance sheets, increase leverage, and change the income statement and cash-flow profile. The rent expense will be replaced by depreciation and interest expense in the income statement, similar to finance leases today. The lease liability is measured in subsequent periods using the effective interest rate method and the ROU asset is depreciated, done on a straight-line.