Introduction

Walk into any Big 4 statutory audit interview and you can almost guarantee Ind AS 116 will come up. A PWC interview experience shared on Medium explicitly lists it as a “frequently asked question” in their audit assurance interviews. The reason is simple: this standard fundamentally changed how companies account for leases, and every organization with rental agreements, equipment leases, or property contracts is affected.

When interviewers ask about Ind AS 116, they are not just testing your memory of accounting rules. They want to see if you understand the paradigm shift from the old standard, can perform the calculations, and know how it impacts financial statements in practice. This article covers the five core questions that appear most often, with interview-ready answers, worked calculations, and guidance on handling follow-up questions.

Question 1: 

What Is Ind AS 116 and How Does It Differ From Ind AS 17?

How Interviewers Ask It:
“Explain the key differences between Ind AS 116 and the erstwhile Ind AS 17” or “What changed in lease accounting with the new standard?”

The Interview-Ready Answer:

Ind AS 116 introduced a single lessee accounting model that eliminates the distinction between finance and operating leases for lessees. Under the old standard, Ind AS 17, companies classified leases as either finance or operating. Operating leases stayed off the balance sheet, which meant companies could effectively hide significant liabilities from investors and lenders.

Ind AS 116 changes this by requiring lessees to recognize a Right-of-Use (ROU) asset and a lease liability for virtually all leases. The only exceptions are short-term leases and low-value assets, which we will discuss later. This brings transparency to lease obligations that were previously buried in footnotes.

Here is how the two standards compare:

Why This Matters:
The shift eliminates off-balance sheet financing, improves transparency for stakeholders, and converges Indian accounting standards with IFRS 16. However, it also means EBITDA appears higher (artificially, since the economics have not changed) and debt ratios increase because of the recognized liability.

Key Points to Emphasize:

• • You understand this was a paradigm shift, not just a technical update

• • Lessor accounting still uses the finance/operating split (a common confusion point)

• • The standard applies to all Ind AS-compliant companies from April 1, 2019

Likely Follow-Up Questions:

• • “Why did the standard change?” (Answer: Convergence with IFRS, addressing off-balance sheet concerns, improving transparency)

• • “Does the finance/operating lease concept still exist?” (Answer: For lessors yes, for lessees no)

Question 2: 

How Do You Calculate ROU Asset and Lease Liability?

How Interviewers Ask It:
“Walk me through the measurement of lease liability” or “How do you calculate the Right-of-Use asset at initial recognition?”

The Interview-Ready Answer:

Start with the lease liability, then build up to the ROU asset. The lease liability is the present value of all lease payments not yet paid, discounted using the appropriate rate.

Lease Liability Components:
Include these payments in your calculation:

• • Fixed payments (less any lease incentives)

• • Variable payments based on an index or rate (like CPI adjustments)

• • Residual value guarantees (amounts expected to be paid)

• • Purchase option exercise price (if reasonably certain to exercise)

• • Termination penalties (if lease term reflects expected termination)

Discount Rate:
Use the interest rate implicit in the lease if readily determinable. If not (which is common), use the lessee’s incremental borrowing rate (IBR). The IBR is the rate the lessee would pay to borrow funds for a similar asset, term, and security. In practice, companies often use their weighted average cost of debt or obtain rates from treasury functions.

ROU Asset Formula:

ROU Asset = Lease Liability + Initial Direct Costs + Prepayments – Lease Incentives + Restoration Costs

Worked Example:
Let us say a company enters a 5-year lease with annual payments of Rs. 100,000 paid at the end of each year. The IBR is 8%. Initial direct costs (legal fees, commissions) are Rs. 10,000. There are no lease incentives or restoration costs.

Step 1: Calculate Lease Liability (Present Value)
PV = 100,000 × [(1 – (1 + 0.08)^-5) / 0.08]
PV = 100,000 × 3.9927
Lease Liability = Rs. 399,270

Step 2: Calculate ROU Asset
ROU Asset = 399,270 + 10,000 + 0 – 0 + 0
ROU Asset = Rs. 409,270

Key Points to Emphasize:

• • You understand the time value of money concept

• • IBR determination is a practical challenge in real audits

• • Initial direct costs specifically exclude general overheads (only direct costs like commissions and legal fees)

Likely Follow-Up Questions:

• • “What discount rate would you use if the implicit rate is not available?” (Answer: IBR, then explain how you would determine it)

• • “How do you treat lease incentives?” (Answer: Deduct from ROU asset, effectively reducing the cost)

• • “What are initial direct costs?” (Answer: Incremental costs directly attributable to obtaining the lease)

Question 3: 

What Is the Impact of Ind AS 116 on EBITDA and Debt Ratios?

How Interviewers Ask It:
“How does Ind AS 116 affect financial ratios?” or “Why does EBITDA increase under the new lease standard?”

The Interview-Ready Answer:

This is where interviewers test whether you understand the real-world implications. Ind AS 116 changes where lease expenses appear in the P&L, which has significant effects on commonly used metrics.

P&L Impact:
Under Ind AS 17, operating lease expense was deducted in arriving at operating profit. Under Ind AS 116, that expense is replaced by:

• • Depreciation of the ROU asset (typically straight-line)

• • Interest on the lease liability (front-loaded, higher in early years)

EBITDA Impact:
This is the key point interviewers want you to explain. Because depreciation and interest are excluded from EBITDA, removing the operating lease expense from above the EBITDA line artificially inflates the metric. The company has not become more profitable, the accounting has just moved the expense.

Debt Ratio Impact:

• • Debt-to-equity increases because of the recognized lease liability

• • Current ratio is affected (portion of liability classified as current)

• • Asset turnover decreases (higher asset base with same revenue)

Practical Example:
Consider a Rs. 100,000 annual operating lease:

Why Interviewers Ask This:
They want to see you understand that EBITDA is higher but this is artificial, that lenders may need to adjust covenants, and that analysts often make their own adjustments to compare companies pre- and post-Ind AS 116.

Key Points to Emphasize:

• • EBITDA increases but there is no economic improvement

• • Covenant considerations are critical for lenders

• • Some analysts add back leases to create comparable metrics

Likely Follow-Up Questions:

• • “Why does EBITDA increase if nothing economically changed?” (Answer: Accounting presentation shift, expense moved below the line)

• • “How do lenders treat lease liabilities in covenants?” (Answer: Many adjust calculations to treat leases as debt)

• • “What ratios are most affected?” (Answer: Debt-to-equity, current ratio, asset turnover, interest coverage)

Master Ind AS and Elevate Your Finance Career.

Question 4: 

What Are the Recognition Exemptions Under Ind AS 116?

How Interviewers Ask It:
“What are the two exemptions under Ind AS 116 and when do you apply them?” or “Are there any leases you do not need to capitalize?”

The Interview-Ready Answer:

Ind AS 116 provides two practical expedients that allow lessees to continue expensing leases on a straight-line basis rather than capitalizing them. These reduce the burden for immaterial leases.

Exemption 1: Short-Term Leases

• • Definition: Lease term of 12 months or less at commencement

• • Critical condition: Cannot contain a purchase option

• • Election: Made by class of underlying asset (all similar assets must use same treatment)

• • Examples: Short-term office rentals, temporary equipment, event spaces

• • Accounting: Expense payments on straight-line basis over lease term

Exemption 2: Low-Value Assets

• • Threshold: Typically USD 5,000 (approximately ₹4–4.5 lakhs) or less when new (indicative, not absolute)

• • Basis: Value of underlying asset, not lease payments

• • Election: Made on asset-by-asset basis (more flexible than short-term)

• • Examples: Tablets, laptops, small office furniture, minor equipment

• • Accounting: Expense payments on straight-line basis

Important Considerations:

• • Assessment is made at commencement date

• • If a short-term lease becomes long-term (due to option exercise), you must capitalize from that point

• • Documentation is required even when using exemptions

• • Disclosure requirements still apply (nature of leases, expense recognized)

Practical Application:
Most companies apply these exemptions to reduce administrative burden. A typical approach is to expense all short-term leases and capitalize everything else, or to set a policy threshold (like Rs. 5 lakh) below which leases are expensed regardless of term.

Key Points to Emphasize:

• • These are practical expedients, not loopholes

• • Must assess at commencement date

• • Different election approaches (by class vs by asset)

Likely Follow-Up Questions:

• • “Can you use both exemptions together?” (Answer: Yes, they are independent)

• • “What happens if a short-term lease becomes long-term?” (Answer: Recognize ROU asset and liability at modification date)

• • “How do you determine ‘low-value’?” {Answer: Based on asset value when new, typically USD 5,000 benchmark (approximately ₹4–4.5 lakhs)}

Question 5:  

Walk Me Through the Journal Entries for a Lease?

How Interviewers Ask It:
“Show me the journal entries for initial recognition” or “How do you account for a lease over its term?”

The Interview-Ready Answer:

This tests your practical accounting skills. Be ready to walk through initial recognition, subsequent measurement, and lease payments.

Initial Recognition (Commencement Date):

Dr. ROU Asset                    Rs. 409,270
    Cr. Lease Liability                      Rs. 399,270
    Cr. Bank (initial direct costs)          Rs. 10,000

Subsequent Measurement (Each Year):

Year 1 entries (using our earlier example):

1. 1. Depreciation (straight-line over 5 years = Rs. 409,270 / 5):

Dr. Depreciation Expense          Rs. 81,854
    Cr. Accumulated Depreciation             Rs. 81,854

2. 2. Interest (8% on Rs. 399,270 opening liability):

Dr. Finance Cost                   Rs. 31,942
    Cr. Lease Liability                       Rs. 31,942

3. 3. Lease Payment:

Dr. Lease Liability               Rs. 100,000
    Cr. Bank                                 Rs. 100,000

Amortization Schedule (First Two Years):

Notice how the interest decreases each year as the liability reduces. This creates a front-loaded expense pattern (higher total expense in early years).

Year 2 Entries:

Dr. Depreciation Expense           Rs. 81,854
    Cr. Accumulated Depreciation              Rs. 81,854

Dr. Finance Cost                    Rs. 26,497
    Cr. Lease Liability                        Rs. 26,497

Dr. Lease Liability                Rs. 100,000
    Cr. Bank                                  Rs. 100,000

Presentation Considerations:

• • ROU asset is typically presented within Property, Plant and Equipment or separately

• • Lease liability is split between current (due within 12 months) and non-current

• • Schedule III format requires specific disclosure lines for Indian companies

Key Points to Emphasize:

• • Front-loaded expense pattern (higher expense early in lease)

• • Interest calculated on outstanding liability balance

• • Depreciation usually straight-line unless another pattern is more appropriate

Likely Follow-Up Questions:

• • “How do you split the liability between current and non-current?” (Answer: Amount due within 12 months is current)

• • “What if the lease has annual escalations?” (Answer: Include in initial measurement if based on index/rate, remeasure if based on other factors)

• • “How do you account for lease modifications?” (Answer: Remeasure liability, adjust ROU asset unless it is a separate lease)

What Interviewers Are Really Testing

Beyond the technical answers, interviewers are assessing three things:

1. Conceptual Clarity
Do you understand WHY the standard changed? Can you explain the problem with off-balance sheet financing? Do you recognize that this was about transparency, not economics?

2. Practical Application
Can you apply the standard to real scenarios? Do you know when to use exemptions? Can you handle follow-up questions about modifications or sale-and-leaseback transactions?

3. Communication Skills
Can you explain complex accounting concepts simply? Do you structure your answers logically? Can you adapt when the interviewer probes deeper?

Red Flags That Hurt Candidates:

• • Confusing lessee and lessor accounting (major error)

• • Not knowing the exemptions exist

• • Unable to explain why EBITDA increases

• • Missing the discount rate hierarchy (implicit rate first, then IBR)

• • Not understanding the front-loaded expense pattern

Green Flags That Impress:

• • Mentioning practical challenges like IBR determination

• • Referencing Schedule III presentation requirements for Indian companies

• • Discussing covenant implications for lenders

• • Showing awareness of recent amendments or carve-outs

• • Using specific numerical examples in your explanation

Tips for Delivery:
Structure your answers using this framework: Definition → Calculation → Example → Impact. Practice explaining these concepts out loud. Be ready for the behavioral question: “Tell me about a time you applied Ind AS 116 in an audit.”

Master Ind AS 116 for Audit Interview

Ind AS 116 is not just another accounting standard. It represents a fundamental shift in how companies report lease obligations, and interviewers know that understanding this standard demonstrates your grasp of modern financial reporting.

The five questions covered here address the full spectrum of knowledge you need:

• • The conceptual shift from Ind AS 17

• • The mechanics of ROU asset and lease liability calculations

• • The financial statement and ratio impacts

• • The practical exemptions

• • The journal entries that bring it all together

Key Takeaways for Your Interview:

• Practice the calculations until you can walk through them confidently

• Understand why EBITDA increases and why that matters

• Know the exemptions and when to apply them

• Be ready to explain journal entries step-by-step

• Remember that lessor accounting still uses the dual model

Final Tip: Interviewers want to see you can apply the standard, not just recite it. Use the numerical examples from this article in your preparation. Practice explaining the concepts out loud. When you can walk through a lease calculation smoothly while explaining the rationale behind each step, you will stand out from other candidates.

The best way to prepare is to teach the material to someone else. Find a study partner, explain these concepts, and have them ask follow-up questions. By the time you walk into that interview room, Ind AS 116 should feel like second nature.

Master Ind AS and Elevate Your Finance Career.

Also read: English for CAs: A Guide for Business Scripts

Frequently Asked Questions

Q.1 Does the finance lease vs operating lease concept still exist under Ind AS 116?

A1: For lessees, no. Ind AS 116 uses a single model where all leases are capitalized (except exemptions). For lessors, yes. Lessor accounting retained the finance/operating lease distinction from Ind AS 17.

Q.2 What discount rate should be used if the interest rate implicit in the lease cannot be determined?

A2: Use the lessee’s incremental borrowing rate (IBR). The IBR is the rate the lessee would have to pay to borrow funds to obtain an asset of similar value, in a similar economic environment, with similar terms and security.

Q.3 How are lease modifications accounted for under Ind AS 116?

A3: First, assess if the modification creates a separate lease (new right-of-use asset, independent pricing). If separate, account as a new lease. If not separate, remeasure the lease liability using a revised discount rate and adjust the ROU asset accordingly.

Q.4 What is the effective date of Ind AS 116 and is it applicable to all companies?

A4: Ind AS 116 is applicable from April 1, 2019. It applies to all companies following Indian Accounting Standards (Ind AS), which includes listed companies and certain unlisted companies meeting net worth thresholds (currently Rs. 250 crore).

Q.5 How do you present lease liabilities in the financial statements?

A5: Lease liabilities must be presented separately from other liabilities in the balance sheet, or disclosed separately in the notes. They are split between current (amounts due within 12 months) and non-current portions.

Q.6 What happens to the ROU asset if a lease is terminated early?

A6: If a lease is terminated early, derecognize both the ROU asset and lease liability. Any difference between the carrying amounts and termination payment is recognized in P&L. If only part of a lease is terminated, reduce both proportionately.