IND AS 116 Leases India 2025: What You Must Know Now!
Introduction to IND AS 116 (Leases)
If you’re a CA student or finance professional in India, understanding Ind AS 116 is essential. This standard has fundamentally reshaped how leases are accounted for, especially by lessees. Replacing Ind AS 17, Ind AS 116 aligns Indian accounting practices with global standards and brings more transparency to financial statements.
This guide breaks down Ind AS 116 in a clear, structured way—covering definitions, exemptions, sale and leaseback accounting, and more—with real-life examples and insights designed to help you confidently navigate this key standard.
What is IND AS 116?
Ind AS 116, introduced by the Ministry of Corporate Affairs (MCA), became effective from April 1, 2019, replacing Ind AS 17. It closely mirrors IFRS 16 and aims to bring lease transactions onto the balance sheet—especially for lessees—by eliminating the classification between operating and finance leases.
Transition from Ind AS 17 to Ind AS 116
Under Ind AS 17, operating leases were off-balance sheet for lessees. This often distorted the financial picture. Ind AS 116 changes that by requiring lessees to recognize most leases as Right of Use (ROU) assets with corresponding lease liabilities, improving transparency.
Scope and Purpose
Ind AS 116 applies to all lease contracts except:
Leases to explore for minerals, oil, natural gas
Biological assets leases
Service concession arrangements
Licenses of intellectual property
Rights held under licensing agreements (films, patents, etc.)
Its primary objective is to ensure users of financial statements have a more complete view of a company’s leasing obligations.
Key Definitions & Initial Recognition
What Constitutes a Lease under Ind AS 116?
A lease is a contract that conveys the right to control the use of an identified asset for a period of time in exchange for consideration. Key conditions:
The asset is physically distinct
The customer has right to direct use of the asset
Lessee’s Model: ROU Asset + Lease Liability
Lessees must recognize:
A Right of Use asset, initially equal to the lease liability (plus initial direct costs)
A Lease liability, calculated as the present value of lease payments using the incremental borrowing rate or interest rate implicit in the lease
Exemptions You Should Know
Ind AS 116 offers practical exemptions for:
Short-term leases: Lease term ≤ 12 months with no purchase option
Low-value asset leases: Assets such as laptops, phones, office furniture
In these cases, lessees can expense lease payments straight to P&L, avoiding ROU recognition.
Transition & Implementation Approaches
Companies could adopt one of two approaches:
Full Retrospective: Adjust all prior periods, as if Ind AS 116 had always been applied
Modified Retrospective: Apply from the date of initial application with no restatement of comparatives. This is the most commonly used method.
Within the modified method, there are two options for measuring ROU assets:
Equal to lease liability (adjusted)
As if the standard had been applied from lease commencement (discounted)
Measurement & Subsequent Accounting
How to Calculate Lease Liability
Lease liability = Present Value of lease payments over lease term, discounted using:
Implicit interest rate (if known), or
Lessee’s incremental borrowing rate
How to Calculate ROU Asset
ROU asset includes:
Lease liability amount
Initial direct costs
Prepaid lease payments
Restoration obligations (if any)
Subsequent Accounting
ROU asset is depreciated (usually straight-line)
Lease liability is reduced as payments are made, with interest expense recognized separately
Impact on Financial Metrics & Disclosures
Ind AS 116 significantly alters financial ratios and disclosure requirements:
Key Financial Impacts
EBITDA increases: As the lease expense is split into depreciation and interest
Debt-equity ratio changes: Due to recognition of lease liability
Asset base grows: Because of ROU assets
Disclosure Requirements
Entities must disclose:
Breakdown of lease expenses
Maturity analysis of lease liabilities
ROU asset movements
Assumptions used in measuring leases
FAQs
What is Ind AS 116?
It’s the Indian Accounting Standard for lease accounting, requiring lessees to recognize ROU assets and lease liabilities.
How is a low-value lease defined in Ind AS 116?
Low-value assets typically cost less than ₹3–5 lakhs and include items like laptops, printers, etc.
What are sale-leaseback accounting changes under Ind AS 116?
From April 2024, gains are limited to transferred rights, and lease liabilities/ROU assets must be recorded accurately.
Conclusion
Ind AS 116 has transformed lease accounting in India by:
Eliminating operating vs finance lease distinction
Bringing lease obligations on balance sheet
Increasing transparency and comparability
Best Practices:
Always assess if a contract contains a lease
Use consistent assumptions for lease term and discount rate
Document key judgments clearly
Apply exemptions carefully and consistently