Ind AS 116 Leases -IFRS 16 Leases
Almost after 8 years Sir David Tweedie, then IASB chairman, expressed his wish to fly in an aircraft that is on an airline’s balance sheet at least once before he dies, the IASB has introduced a new accounting model for lessees. The aeroplane has finally landed ON to the Balance sheet with the introduction of IFRS 16 Leases globally and Ind AS 116 Leases in India.
The dream of Sir David Tweedie to fly in an airplane, which is recorded on the balance sheet, is finally comes true.
Now, let’s understand what Ind AS 116 leases or IFRS 16 leases is all about;
What is Ind AS 116 Leases changing-the new lease accounting standard?
Under Ind AS 116 Leases, now lessees will not have to distinguish between a finance lease (on balance sheet) and an operating lease (off balance sheet).All the leases whether operating or finance leases will now be known as “Right of Use assets” and will be presented as “Non-Current Assets” ON to the balance sheet.
There is an exception of low value items and leases of short duration, less than 12 months, will continue to be recognized as part of expenses of the current year. The reason behind this change is the thought that – Lease Accounting Standard is almost equal to buying an asset in terms of economic substance or bearing the risk of liability by committing payments over a period of time.
Lessees recognise interest expense on the lease liability and a depreciation charge on the ‘right-of-use’ asset. Earlier, the same was being charged as an operating lease in a single line and spread over the lease term on straight line basis.
Right of use assets will be depreciated on straight line basis over shorter of lease term or useful and present value of lease liability will be unwinded on the basis of promise of payments with the interest rate implicit in the lease, in other words application of effective interest rate method to lease liability. This will result in higher charge to profit or loss account in initial year and decreasing gradually over time.
The key ratios will be impacted with interest component of lease liability now will be presented as finance costs and EBIDTA will be higher, since the operating leases expenses was earlier deducted in arriving at the value of EBIDTA, which will now be shifting as a below the line item for EBIDTA, resulting in increase in EBIDTA figures. Another impact on EBIDTA will be depreciation charge on ROU asset which will also add to the increment in EBIDTA.
The recognition of a lease liability and ROU asset will have an impact on ROCE calculations and debt to equity ratios.
In the cash flow statement, lease payments relating to contracts that reflect the repayment of the principal portion of the lease liability will be included in financing activities which were previously classified as operating leases presented within operating activities in a cash flow statement. The presentation of the interest portions depends on the entity’s accounting policy regarding interest paid (that is, either within operating or within financing activities).
If an entity elects optional exemptions for short term leases or leases of low-value assets are presented as part of operating activities.
Under leases, variable lease payments not included in the measurement of the lease liability forms part of profit or loss account and in cash flow statement presented as part of operating activities.
Lease accounting standards stays almost the same as under Ind AS 17 Leases with addition of new disclosure requirements.
The accounting professionals are reviewing the Lease Accounting Standards to bring in the change and allowing the aeroplane to finally land ON to the balance sheet beginning 1 Jan 2019 around the world and beginning 1 April 2019 in India.
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