(i) Lease definition: Under Ind AS 116, the definition of lease is similar to that in AS 19. But, in Ind AS 116, there is substantial change in the guidance of how to apply this definition. The changes primarily relate to the concept of ‘control’ used in identifying whether a contract contains a lease or not.
(ii) Modifications: Ind AS 116 brings in comprehensive prescription on accounting of modifications in lease contracts.
(iii) Scope: AS 19 excludes leases of land from its scope. Ind AS 116 has no such scope exclusion.
(iv) Inception and commencement: Ind AS 116 makes a distinction between ‘inception of lease’ and ‘commencement of lease’ unlike AS 19.
(v) Treatment of Initial direct cost: For lessor, the treatment of initial direct costs under Ind AS 116 differs from the treatment prescribed under AS 19.
(a) Finance leaselessor accounting
- Non-manufacturer/Non-dealer
AS 19 Either recognised as expense immediately or allocated against the finance income over the lease term.
Ind AS 116 Interest rate implicit in the lease is defined in such a way that the initial direct costs included automatically in the finance lease receivable.
- Manufacturer/dealer
AS 19 Recognised as expense immediately.
IndAS 116 Same as per AS 19.
(b) Operating lease-Lessor accounting
AS 19 Either deferred and allocated to income over the lease term in proportion to the recognition of rent income, or recognized as expense in the period in which incurred.
Ind AS 119 Added to the carrying amount of the leased asset and recognised as expense over the lease term on the same basis as lease income.
(vi) Major difference in 'Lessee Accounting' are as follows:
(a) Classification
AS 19 AS 19 requires a lessee to classify leases as either finance leases or operating leases.
Ind AS 116 Ind AS 116 eliminates the requirement of classification of leases as either operating leases or finance leases for a lessee and instead, introduces a single lessee accounting model.
(b) Operating lease accounting
AS 19 Lease payments under an operating lease are recognised as an expense on a straight line basis over the lease term, unless another systematic basis if more appropriate. Operating leases are not reported on a company’s Balance sheet i.e. liabilities are treated as an off balance sheet expense.
Ind AS 116 A lessee is required to recognise assets and liabilities for all leases unless it applies the recognition exemption i.e., Assets under lease (Right of use asset) and related liabilities will be recorded in the books of account.
(c) Treatment of Contingent rents and Variable lease payments
AS 19 All items considered as Contingent Rents were accounted in the period in which the event or condition that triggers those payments occurs.
Ind AS 116 The concept of Contingent Rent has been replaced with Variable Lease Payments. In Ind AS 116, such items are termed as variable lease payments and accounting for some items differs. Variable Lease Payments that depend on an index or a rate (e.g. Consumer Price Inflation index, Interest rate benchmark - MIBOR, are included in the initial measurement of lease liability using the index or rate as at the commencement date. Subsequent changes in those index or rate are adjusted as in the lease liability and right of use asset in the period in which those changes occur. Other Variable Lease Payments such as those linked to future sales are recognised in the statement of profit and Loss in the period in which the payment trigger occurs.
(vii) Sale & Leaseback transactions:
(a) As per AS 19, if a sale and leaseback transaction results in a finance lease, excess, if any, of the sale proceeds over the carrying amount shall be deferred and amortised by the seller-lessee over the lease term in proportion to depreciation of the leased asset. In Ind AS 116, the approach for computation of gain/loss for a completed sale is different. The amount of gain/loss should reflect the amount that relates to the right transferred to the buyer-lessor.
(b) Ind AS 116 requires a seller-lessee and a buyer-lessor to use the definition of a sale as per Ind AS 115, Revenue from Contracts with Customers to determine whether a sale has occurred in a sale and leaseback transaction. If the transfer of the underlying asset satisfies the requirements of Ind AS 115 to be accounted for as a sale, the transaction will be accounted for as a sale and a lease by both the lessee and the lessor.The Seller lessee shall measure right-of-use asset at the proportion of the previous carrying amount that relates to right-of use retained by the seller-lessee. Hence, gain/loss is recognised only to the extent of rights transferred to the buyor-lessor and it will be different from the amount that would have been recognised under AS 19. If not, then the seller-lessee shall recognise a finance liability and the buyerlessor will recognise a financial asset to be accounted for as per the requirements of Ind AS 109, Financial Instruments. AS 19 does not contain such specific requirement.
(viii) Initial Direct cost: Ind AS 116 contains clearer definition of ‘initial direct costs’. Further, definition of the term ‘interest rate implicit in the lease’ has been modified in Ind AS 116.
(ix) Presentation: As a consequence of introduction of single lease model for lessees, there are many changes in the presentation in the three components of financial statements viz. Balance sheet, Statement of P&L, Statement of Cash flows.
(x) Disclosure: There are a number of changes in the disclosure relating to qualitative aspects of leasing transactions. For eg. Entities are required to disclose the nature and risks arising from leasing transactions. Also, in case of lessor, there are changes in the disclosure of maturity analysis of leases payments receivable.
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