What is IND AS 116
At the end of every financial year, companies have to show how much their business is worth to their stakeholders in form of a balance sheet. Although you can show your revenue and expenditure in terms of number. in the case of other things i.e. their machinery, office furniture, building, etc. They can't only show it that they have three buildings and four machinery, They also have to show how much the machinery and buildings are worth now after regular wear and tear. Therefore to calculate those values they need to follow some set of rules i.e. IND AS. Before diving into the depth of IND AS 116 let us understand how IND AS was formed.
IND AS stands for Indian Accounting standards. IND AS is a set of rules which is followed to calculate the assets and liabilities of an indian company. IND AS came into existence because The Government of India in consultation with ICAI decided to converge and not to adopt International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB). IND AS was implemented in 4 phases. There are 41 IND AS announced by MCA to date.
Now, We have the basic knowledge of IND AS let us understand the main topic of this blog i.e. IND AS 116
Each IND AS is assigned to calculate the asset value of one item. INDAS 116 was effective from 1st April 2019. It has replaced existing Ind AS 17: Leases. IND AS 116 deals with all types of leases which also includes leases of right-of-use assets in a sublease. Although there are certain exceptions where IND AS 116 is not followed,
Those exceptions are:
- leases to explore for or use minerals, oil, natural gas, and similar non-regenerative resources
- leases of biological assets held by a lessee within the scope of Ind AS 41
- service concession arrangements within the scope of Appendix D of Ind AS 115
- licenses of intellectual property granted by a lessor within the scope of Ind AS 115
- rights held by a lessee under licensing agreements within the scope of Ind AS 38, Intangible Assets, for such items as motion picture films, video recordings, plays, manuscripts, patents, and copyrights.
Some of the key takeaways from the implementation of this IND AS 116 are:
- Before IND AS 116, there were two accounting standards for lease transactions, first, Ind AS 17, which is applicable to Ind AS compliant companies, and second was AS 19, which is applicable to the remaining classes of companies. Ind AS 116 proposes to replace Ind AS 17, therefore, the companies which are not covered by Ind AS shall continue to follow old accounting standards.
- The applicability of this standard is used to examine the lessor and the lessee separately. For eg: if the lessor is Ind AS compliant and the lessee is not Ind AS compliant, then the lessor will follow Ind AS 116 whereas the lessee will follow AS 19.
- The major changes in lessee accounting are related to the introduction of a unified lease accounting model by canceling the division of operating leases and financial leases and confirming the gains/losses of sale and leaseback transactions. Previously, operating leases were not fully included in the lessee's balance sheet, but according to the standard, the lessee must confirm the right to use in its balance sheet, which would cause the debtor to incur lease liabilities
- There were no changes in the accounting treatment in the case of financial leases and lessors accounting
- Foreign currency leases shall increase profit & loss volatility due to a restatement of foreign currency liability.
- For aircraft and other assets taken on an operating lease, the airline company will have to recognize the right to use the asset together with a lease liability on the balance sheet.
The latest amendments made by MCA extend the benefits of the COVID 19 related rent concession that were introduced last year from 30 June 2021 to 30 June 2022. The benefits allowed lessees to recognize COVID 19 related rent concessions as income rather than as lease modification.