Ind AS 116 lease accounting: a practical walkthrough for Indian finance teams

Ind AS 116 has applied to Indian companies on the Ind AS framework since 1 April 2019. For a lessee it removed the old split between operating and finance leases: almost every lease now puts a right-of-use (ROU) asset and a lease liability on the balance sheet. The rent line in the P&L is replaced by depreciation and interest. This guide walks through the workings in the order you would actually prepare them.

1. Is it a lease at all?

A contract contains a lease if it conveys the right to control the use of an identified asset for a period of time in exchange for consideration (Ind AS 116, para 9). In practice ask two questions:

Is there an identified asset? A specific office floor, vehicle or DG set is identified. If the supplier can substitute the asset freely and benefits from doing so, it usually is not.
Does the customer direct its use and get substantially all its economic benefits? A dedicated warehouse you control is a lease. A logistics contract where the transporter decides which truck turns up is usually a service.

2. Check the two exemptions first

A lessee may choose not to apply the balance-sheet model to short-term leases (a lease term of 12 months or less with no purchase option) and to leases of low-value assets such as laptops or furniture items (para 5). Payments are then expensed on a straight-line basis (para 6). The short-term election is made by class of asset; the low-value election lease by lease. Document the policy, because auditors will ask for it.

3. Fix the lease term

The lease term is the non-cancellable period plus extension options you are reasonably certain to exercise and termination options you are reasonably certain not to exercise (para 18). For Indian property leases with an 11-month or 3-year lock-in and long renewal options, this judgement drives the numbers more than anything else. Record the reasons: significant leasehold improvements, relocation costs, or the strategic importance of the location.

4. Measure the lease liability

At commencement the liability is the present value of lease payments not yet paid (para 26). Lease payments include fixed payments less incentives receivable, variable payments that depend on an index or rate, expected residual value guarantees, a purchase option price if reasonably certain, and termination penalties if the term assumes termination (para 27). Payments linked to sales or usage are left out and expensed as incurred.

Discount at the rate implicit in the lease if it can be readily determined; otherwise use the lessee's incremental borrowing rate (IBR), the rate you would pay to borrow over a similar term, with similar security, for an asset of similar value. Keep the IBR working on file: bank sanction letters, recent borrowing rates and the adjustment for term.

5. Measure the right-of-use asset

The ROU asset at cost is the lease liability plus payments made at or before commencement, initial direct costs and the estimated restoration cost (recognised as an Ind AS 37 provision), less lease incentives received (para 24).

6. Worked example

A company leases an office for 3 years from 1 April 2025. Rent is ₹1,00,000 a month, paid in advance, with a 5% escalation every 12 months. IBR is 9% a year. There are initial direct costs of ₹20,000 and a fit-out incentive of ₹5,000 from the landlord.

Item	Amount (₹)
Total rent over 3 years	37,83,000
First rent, paid on commencement (excluded from liability)	1,00,000
Lease liability: PV of the remaining 35 payments at 9% p.a.	32,36,163
ROU asset: 32,36,163 + 1,00,000 + 20,000 − 5,000	33,51,163

The annual 9% is converted to an equivalent monthly rate, (1.09)^1/12 − 1 ≈ 0.7207%. Each month interest is charged on the opening liability, payments reduce it, and the ROU asset is depreciated straight-line over 36 months (≈ ₹93,088 a month). You can reproduce every figure with the free Ind AS 116 lease calculator or the Template D Excel schedule.

Right-of-use asset             Dr  33,51,163
Bank / landlord (incentive)    Dr       5,000
    To Lease liability                 32,36,163
    To Bank (first rent)                1,00,000
    To Bank (initial direct costs)        20,000

7. Every month after that

Interest on the liability (effective interest method) goes to finance cost.
Depreciation on the ROU asset follows Ind AS 16, normally straight-line over the shorter of lease term and useful life.
Rent paid reduces the liability; it is no longer an expense.

Total P&L cost is higher in the early years and lower later (front-loading), because interest falls as the liability is repaid. EBITDA rises because rent disappears from operating expenses. Explain this to management before the first quarter's MIS goes out.

8. Presentation and disclosure

Show ROU assets and lease liabilities separately or disclose the line items that include them (para 47).
Split the liability into current (principal repayable in the next 12 months) and non-current. The FY summary in the calculator does this for you.
In the cash flow statement, principal repayments go under financing activities; interest follows your Ind AS 7 policy (para 50). Short-term, low-value and variable payments stay in operating activities.
Disclose the maturity analysis of lease liabilities as required by Ind AS 107.

9. Deferred tax

For tax purposes rent is generally allowed as paid, so the ROU asset and lease liability create temporary differences. Following the Ind AS 12 amendment on deferred tax related to assets and liabilities arising from a single transaction (notified by MCA in 2023), the initial recognition exemption does not apply where equal taxable and deductible temporary differences arise, so deferred tax is recognised on leases. Check the position for your entity with your tax advisor.

10. What auditors usually test

Completeness: a lease register reconciled to rent GLs, agreements and fixed asset additions.
Lease term judgements and the IBR working.
Remeasurement when rent escalates on an index, a lease is extended early, or premises are surrendered.
The current/non-current split and the cash flow classification.