IND AS 116, LEASES – A PRACTICAL APPROACH 9 MAY 2019 -WEBCAST Ind AS Implementation Group Accounting Standards Board The Institute of Chartered Accountants of India, New Delhi, India
DISCLAIMER ICAI The views expressed by the presenter are his personal views and based on professional judgements The views of the presenter may not be construed as the conclusions or opinions of the Ind AS Implementation Group or the Accounting Standards Board or that of the Institute of Chartered Accountants of India Due care and professional judgements may be exercised by the audience in applying the requirements of the Standard 2
STRUCTURE OF THE DISCUSSION ICAI A snap shot of the Key Case Standard Impact Areas Study Practical Transitional The expedients Provisions Next Steps 3
A SNAPSHOT OF THE STANDARD ICAI Erstwhile Ind AS 17 Ind AS 116 A lease is an agreement whereby the A contract, or part of a contract, that lessor conveys to the lessee in return for conveys the right to use an asset (the a payment or series of payments the right underlying asset) for a period of time in to use an asset for an agreed exchange for consideration. period of time Future lease payments in respect of Right of use Asset is recognised with operating leases are off balance sheet corresponding Lease liability in the items balance sheet for all operating leases Operating lease payments are charged to Depreciation (on Right of use Assets) and the profit and loss as expense on a finance costs (on Lease Liability) to be straight line basis recognised in the financial statements of the Lessee 4
HOW IT LOOKS LIKE? ICAI Rs.in Lakhs Balance Sheet Assets Under Ind AS 17 Under Ind AS 116 Impact on • Debt to Equity Total existing assets 38,750 38,750 ROI • Right of use assets NA 14,500 Asset Coverage • Total Assets 38,750 53,250 Current Ratio • Equity and Liabilities Under Ind AS Under Ind AS 116 • Business 17 valuations Total existing equity 38,750 38,750 Impact on loan • and liabilities covenants Lease Liability NA 14,500 Total Liabilities 38,750 53,250 5
HOW IT LOOKS LIKE? ICAI Rs.in Lakhs Statement of profit and loss Impact on Particulars Under I Under nd AS 17 Ind AS 116 EBITDA • Profit before lease 7421 7421 • Interest Cover accounting • Free cash accruals Operating lease expenses (451) NA Front loading of • expenses Low value/ short term NA (98) PBT in initial years leases • • Operating cash flow EBITDA 6,970 7,323 • Financing cash flow Depreciation on ROU asset NA (1,450) Finance cost on Lease NA (145) Liability Profit for the period 6,970 5,728 6
IDENTIFYING A LEASE ICAI Assessment to be at inception Re-assess only if terms and Is it a lease? conditions of contract changed Right to control the use & Identified Asset of an identified asset Right to obtain substantially all Right to direct the use economic benefits from use
POINTS TO PONDER ICAI • Accounting for bundled contract containing both lease and provision of services by Lessees • When the supplier has a substantive substitution right • If exists, there is no identified asset • Substitution of the asset during repairs or maintenance periods does not, represent a substantive right of substitution • The ability to substitute if new technology becomes available does not represent a substantive right of substitution
IDENTIFIED ASSET ICAI Portion of Identified asset? Physically distinct Capacity portion portion Substantially all the A minimal portion of the capacity? capacity
LEASE TERM ICAI Extension and Termination options to be considered in determining the lease term Reasonably certain Reasonably certain that the option to that the option to Initial lease period extend will be terminate will be elected elected Reassess and revise estimate of Lease Term at every reporting period based on facts and circumstances
POINTS TO PONDER ICAI The entity will need to consider all relevant facts and circumstances that create an ‘economic incentive’ for the lessee to exercise the option to extend a lease or terminate it • Contractual terms for optional periods and market rates • Significant leasehold improvements • Costs of termination and return • Importance to operations (specialised, location, alternatives) • Conditionality associated with option
INITIAL MEASUREMENT ICAI At the commence of lease, recognise right of use asset and lease liability Right of use asset Lease Liability (At cost) (PV of lease payments) Discount the lease payments to arrive at the present value of right of use asset/ lease liability
DISCOUNT RATE ICAI Lease payments shall be discounted using Interest rate implicit in the Incremental borrowing rate of lease the lessee Use rate implicit in the lease or Incremental borrowing rate
POINTS TO PONDER ICAI • Can an entity directly use incremental borrowing rate as the discount rate? • Implicit interest rate requires fair value of underlying asset and initial direct cost incurred by the Lessor • Significant judgements involved in determining incremental borrowing rate • Similar term • Similar security • Similar fund required to be borrowed in a similar economic environment • Adjustment factors may include (a) Lease Term (b) Repayment profile (c) Credit Risk (d) Loan Security
SUBSEQUENT MEASUREMENT ICAI Lease Liability Right of Use Asset • Increase the lease liability to reflect • Apply depreciation requirements in the interest Ind AS 16 • Decrease the lease liability to reflect • Depreciate over the useful life payments made (taking extension options into consideration) • Test for Impairment under Ind AS 36, if indicators are existing
CASE STUDY IN THE LESSEE’S ACCOUNTS UNDER IND AS 116 ICAI ABC, the manufacturing company, needs to adopt the new standard Ind AS 116 Leases in the reporting period ending 31 March 2020. During the preparatory works, ABC discovered that the operating lease contract related to a machine might require some adjustments. ABC entered into the contract on 1 April 2017 for 5 years, annual rental payments are Rs.1.25 Lakhs in arrears (that is, 31 March each year) and at the end of the lease term, the machine will be returned back to the lessor. The economic life of a machine is 10 years. How can ABC restate the contract under Ind AS 116 using both full retrospective and modified retrospective approach? Use the discount rate of 10%. 1 6
CALCULATION OF PRESENT VALUE OF LEASE PAYMENTS ICAI Year ending Lease Discount factor Present value of payments lease payments 31-03-2018 1,25,000 0.9091 1,13,636 31-03-2019 1,25,000 0.8264 1,03,306 31-03-2020 1,25,000 0.7513 93,914 31-03-2021 1,25,000 0.6830 85,377 31-03-2022 1,25,000 0.6209 77,615 Total 6,25,000 4,73,848 Note: Discount factor in the first year is calculated as 1/((1+10%) to the power of year 1), etc. The right of use asset equals to the lease liability at the commencement date, plus lessee’s initial direct costs, plus some other things – but in this case, we have nothing like that, so let’s just say it’s the same as the lease liability. 1 7
JOURNAL ENTRY ICAI Under Ind AS 116, the initial journal entry would be Date Particulars Debit Credit 1 April 2018 Right to use asset a/c Dr 4,73,848 To Lease liability a/c 4,73,848 Subsequently, ABC needs to take care about 2 things: 1. Depreciation of the ROU asset : Let’s say it’s straight line over the lease term of 5 years, thus it’s Rs. 94,770 per year (Rs. 4,73,848/5). 2. Lease payments: Each lease payment of Rs.1,25,000 is split between the repayment of the lease liability and interest. 1 8
CALCULATION FOR SPLITTING OF LEASE LIABILITY AND INTEREST ON REPAYMENT ICAI Year ending Lease Lease Interest Decrease in Lease liability payment (B = A*10%) lease liability Liability c/f b/f (A) (C = 1,25,000 - B) (D = A - C) 31-03-2018 4,73,848 1,25,000 47,385 77,615 3,96,223 31-03-2019 3,96,223 1,25,000 39,623 85,377 3,10,857 31-03-2020 3,10,857 1,25,000 31,086 93,914 2,16,942 31-03-2021 2,16,942 1,25,000 21,694 1,03,306 1,13,636 31-03-2022 1,13,636 1,25,000 11,364 1,13,636 0 Total 6,25,000 1,51,152 4,73,848 1 9
PORTFOLIO APPLICATION ICAI Standard may be applied for a portfolio of leases No material changes is expected from applying All leases in the portfolio this Standard to the have similar individual leases within characteristics that portfolio Entity shall use estimates and assumptions that reflect the size and composition of the portfolio.
LOW VALUE ASSETS ICAI For leases for which the underlying asset is of low value, entity may apply Para 6 of Ind AS 116 Either on a straight-line basis Lease payments associated with over the lease term or another those leases are accounted as systematic basis an expense Option can be applied on a lease by lease basis If a lessee subleases an asset, or expects to sublease an asset, the head lease does not qualify as a lease of a low-value asset
SHORT TERM LEASES ICAI A lease that, at the commencement date, has a lease term of 12 months or less Either on a straight-line basis Lease payments associated over the lease term or another with those leases are systematic basis accounted as an expense Option can be applied only based on class of underlying asset A lease that contains a purchase option is not a short-term lease
Recommend
More recommend
