The objective of the standard Ind AS 116 Leases is to specify the
rules for recognition, measurement, presentation and disclosure of leases.
But, why is there a new lease standard when we had an older Ind AS 17
Leases?
We have already discussed the Transition from Ind AS 17 to Ind AS 116 and Ind AS 116 Lease : a bird eye view
We have already discussed the Transition from Ind AS 17 to Ind AS 116 and Ind AS 116 Lease : a bird eye view
The main reason is that under Ind AS 17, lessees were still able to hide
certain liabilities resulting from leases and simply not present them on the
face of the financial statements.
I’m talking about operating leases, especially those with
non-cancellable terms and having constant outflow year after year.
Under the new standard, lessees will need to show all the leases right
in their statement of financial position instead of hiding them in the notes to
the financial statements.
Currently analyst adjust financial statements for off - balance sheet
leases. Under Ind
AS 116, companies will bring these leases on balance sheet, using a common
methodology
Major Impact for Lessees
Ind AS
116 will bring all major leases in Financial Statement, althought same was
disclosed in notes but same was not read by stakeholders in detail.
The objective of the standard Ind AS 116 Leases is to specify the
rules for recognition, measurement, presentation and disclosure of leases.
But, why is there a new lease standard when we had an older Ind AS 17
Leases?
The main reason is that under Ind AS 17, lessees were still able to hide
certain liabilities resulting from leases and simply not present them on the
face of the financial statements.
I’m talking about operating leases, especially those with
non-cancellable terms and having constant outflow year after year.
Under the new standard, lessees will need to show all the leases right
in their statement of financial position instead of hiding them in the notes to
the financial statements.
Currently analyst adjust financial statements for off - balance sheet
leases. Under Ind
AS 116, companies will bring these leases on balance sheet, using a common
methodology
Major Impact for Lessees
Ind AS
116 will bring all major leases in Financial Statement, althought same was
disclosed in notes but same was not read by stakeholders in detail.

Impact of Balance Sheet
Companies with operating leases will appear
to be more asset-rich, but also more heavily indebted
The Asset and liability will be accounted as same on day 1 but asset will be depreciated and the liability will decrease on payment of rentals, and liability will increase due to interest effect on same. The mismatch will bring change in net asset over some period.
Impact of Profit and Loss Account
Total lease expenses will be front-loaded even when
cash rentals are constant
The Lease rentals will be accounted as depreciation of right of use and Interest will be charged on liability component standing in the balance sheet.
Contract, or part of a contract, that conveys the right to use an asset
for a period of time in exchange of consideration
The new definition increases focus on who
controls the asset and may change which contracts are leases
Impact on Financial ratios
The above mismatch in Balance Sheet and Profit and Loss will effect the above ratios.
- The EBIDTA will rise as the rental income will become depreciation and Interest,
- The EPS will fall as net impact will be higher in earlier years due to base of Asset in Use and Interest on Liability
- The Total Asset will increase as such assets were never recognised, but there will be deficit in net asset over the years
- The Gearing ratio will rise and interest cover Asset Turnover will fall due to increase in interest cost which was never recognised earlier.
Some
questions to assess the impact on your company’s financial statements
Broader Business Impacts