Ind AS 116 changed lease accounting more than almost any other standard in recent memory. The idea at its heart is simple to state: if you have the right to use an asset for a period of time in exchange for payment, that right is an asset you control, and the payments you owe are a liability — so both should appear on your balance sheet. Before Ind AS 116, a company could rent thousands of square feet of office space, a fleet of vehicles, or a factory for years, and none of it showed up as an asset or a liability. It was "off balance sheet." Ind AS 116 brought almost all of that on balance sheet through a single lessee model, and in doing so it changed reported assets, liabilities, profit shape, EBITDA, and a range of financial ratios.
This guide walks through the standard step by step, in plain language, with numerical examples set out in tables so you can see exactly how the numbers move.
The big picture in one paragraph
For a lessee (the person renting the asset), Ind AS 116 says: at the start of the lease, put a right-of-use asset and a lease liability on the balance sheet, both equal (broadly) to the present value of the future lease payments. Then, over the lease term, depreciate the asset (usually straight-line) and unwind the liability using the interest method — so the single "rent expense" of the old world is replaced by depreciation plus interest. For a lessor (the person who owns the asset and rents it out), almost nothing changed — lessors still classify leases as finance or operating leases, much as under the old AS 19.
Objective and scope
The objective of Ind AS 116 is to ensure that lessees and lessors provide relevant information that faithfully represents lease transactions — giving users of financial statements a basis to assess the effect of leases on financial position, financial performance, and cash flows. The standard applies to all leases, including subleases, with a few specific exclusions (for example, leases to explore for or use minerals, oil, and natural gas; leases of biological assets under Ind AS 41; service concession arrangements; certain licences of intellectual property; and rights held under licensing agreements for items such as films and patents).
What counts as a lease?
This is the first and most important question, because everything follows from it. A contract is, or 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. Two elements must both be present:
An identified asset. The asset must be specified (explicitly or implicitly), and the supplier must not have a substantive right to substitute a different asset throughout the period of use. If the supplier can freely swap the asset for another and would benefit from doing so, there is no identified asset — and no lease.
The right to control the use of that asset throughout the period of use. This means the customer has both (a) the right to obtain substantially all of the economic benefits from using the asset, and (b) the right to direct how and for what purpose the asset is used.
The table below shows how this test plays out in practice.
| Arrangement | Identified asset? | Right to control use? | Lease? |
|---|---|---|---|
| A company leases a specific, named floor of a building for 5 years | Yes — a specified floor, not substitutable | Yes — it gets the benefits and decides how the space is used | Yes |
| A company buys warehousing capacity, but the provider can store the goods in any of its warehouses and freely move them | No — the provider can substitute freely and benefits from doing so | — | No (service) |
| A retailer takes a named delivery van for 3 years but the transport firm decides the routes, schedule, and cargo | Yes — a specific van | No — the firm, not the retailer, directs how and for what purpose the van is used | No (service) |
| A firm leases a named machine and decides what it produces, when it runs, and how it is operated | Yes — a specific machine | Yes — it directs how and for what purpose the machine is used | Yes |
If the arrangement is not a lease, it is generally a service contract and is expensed as the service is received.
The lessee model — the heart of the standard
For lessees, Ind AS 116 abolishes the old distinction between operating and finance leases. Instead, there is a single model: at the commencement date (when the asset is made available for use), the lessee recognises two things.
1. The lease liability
The lease liability is measured at the present value of the lease payments that are not paid at the commencement date, discounted using the interest rate implicit in the lease if that rate can be readily determined, or otherwise the lessee's incremental borrowing rate (the rate the lessee would have to pay to borrow, over a similar term and with similar security, the funds needed to obtain an asset of similar value).
The lease payments included in the measurement are: fixed payments (less any lease incentives receivable); variable lease payments that depend on an index or a rate (initially measured using the index or rate at commencement); amounts expected to be payable under residual value guarantees; the exercise price of a purchase option if the lessee is reasonably certain to exercise it; and payments of penalties for terminating the lease if the lease term reflects the lessee exercising a termination option.
2. The right-of-use (ROU) asset
The right-of-use asset is measured at cost, which comprises: the amount of the initial measurement of the lease liability; any lease payments made at or before the commencement date (less any lease incentives received); any initial direct costs incurred by the lessee; and an estimate of costs to dismantle and remove the asset or restore the site (a decommissioning/restoration provision), where the lessee has such an obligation.
After commencement — how the numbers behave
After the commencement date:
The lease liability is increased by interest (the unwinding of the discount) and reduced by the lease payments made. Interest is calculated as the discount rate applied to the opening liability each period.
The right-of-use asset is depreciated — generally on a straight-line basis from the commencement date to the earlier of the end of the asset's useful life or the end of the lease term (if ownership is expected to transfer, or a purchase option is reasonably certain, depreciation is over the asset's useful life).
The crucial consequence: the old single straight-line "rent expense" is replaced by depreciation (straight-line) + interest (front-loaded). Because interest is higher in the early years (the liability is larger) and lower later, the total expense is front-loaded — higher in the early years of the lease and lower towards the end — even though the cash paid may be level.
A full worked example (lessee)
Let's put real numbers to it. Assume a company leases office space for 5 years, with rent of ₹10,00,000 per year, paid at the end of each year. The company's incremental borrowing rate is 8%. There are no initial direct costs, incentives, or restoration obligations.
Step 1 — Measure the lease liability (present value of the 5 payments at 8%).
| Year | Payment (₹) | Discount factor @ 8% | Present value (₹) |
|---|---|---|---|
| 1 | 10,00,000 | 0.9259 | 9,25,926 |
| 2 | 10,00,000 | 0.8573 | 8,57,339 |
| 3 | 10,00,000 | 0.7938 | 7,93,832 |
| 4 | 10,00,000 | 0.7350 | 7,35,030 |
| 5 | 10,00,000 | 0.6806 | 6,80,583 |
| Total | 50,00,000 | — | 39,92,710 |
So the lease liability and the right-of-use asset are both recognised at commencement at ₹39,92,710.
Step 2 — Roll forward the lease liability over 5 years (interest at 8% on the opening balance; reduce by the ₹10,00,000 payment).
| Year | Opening liability (₹) | Interest @ 8% (₹) | Payment (₹) | Closing liability (₹) |
|---|---|---|---|---|
| 1 | 39,92,710 | 3,19,417 | (10,00,000) | 33,12,127 |
| 2 | 33,12,127 | 2,64,970 | (10,00,000) | 25,77,097 |
| 3 | 25,77,097 | 2,06,168 | (10,00,000) | 17,83,265 |
| 4 | 17,83,265 | 1,42,661 | (10,00,000) | 9,25,926 |
| 5 | 9,25,926 | 74,074 | (10,00,000) | 0 |
Step 3 — Depreciate the right-of-use asset straight-line over 5 years: ₹39,92,710 ÷ 5 = ₹7,98,542 per year.
Step 4 — See the total expense each year (depreciation + interest), and compare it with the old "rent expense" of ₹10,00,000 a year.
| Year | Depreciation (₹) | Interest (₹) | Total under Ind AS 116 (₹) | Old "rent expense" (₹) |
|---|---|---|---|---|
| 1 | 7,98,542 | 3,19,417 | 11,17,959 | 10,00,000 |
| 2 | 7,98,542 | 2,64,970 | 10,63,512 | 10,00,000 |
| 3 | 7,98,542 | 2,06,168 | 10,04,710 | 10,00,000 |
| 4 | 7,98,542 | 1,42,661 | 9,41,203 | 10,00,000 |
| 5 | 7,98,542 | 74,074 | 8,72,606 | 10,00,000 |
| Total | 39,92,710 | 10,07,290 | 50,00,000 | 50,00,000 |
Notice three things in that final table. First, the total expense over the life is the same — ₹50,00,000 either way (it must be; the cash paid is ₹50,00,000). Second, under Ind AS 116 the expense is front-loaded: ₹11,17,959 in year 1 falling to ₹8,72,606 in year 5, versus a flat ₹10,00,000 under the old operating-lease approach. Third, the split changes the income statement geography — under Ind AS 116, ₹7,98,542 of each year's charge is depreciation and the rest is interest (a finance cost), whereas the old approach put the whole ₹10,00,000 in operating expenses. This is why Ind AS 116 increases EBITDA (depreciation and interest both sit below EBITDA) even though total profit over the lease is unchanged.
The two big exemptions
Recognising every lease on the balance sheet would be burdensome for small, everyday leases. So Ind AS 116 gives lessees an election to keep two categories off balance sheet, recognising the payments simply as an expense on a straight-line basis (just like an old operating lease):
| Exemption | What it covers | Condition / limit | Accounting if elected |
|---|---|---|---|
| Short-term leases | Leases with a term of 12 months or less at the commencement date | Must contain no purchase option; elected by class of underlying asset | Payments expensed on a straight-line basis over the lease term |
| Low-value asset leases | Leases where the underlying asset is of low value when new (e.g. tablets, small IT equipment, small items of office furniture) | Assessed on the value of the asset when new, regardless of materiality to the lessee; elected lease-by-lease | Payments expensed on a straight-line basis over the lease term |
These exemptions are a practical relief and are widely used for things like leased laptops, printers, and short-term equipment hire.
Lessor accounting — much less changed
For lessors, Ind AS 116 largely retains the model from the old standard. A lessor still classifies each lease as either a finance lease or an operating lease, based on whether the lease transfers substantially all the risks and rewards incidental to ownership of the underlying asset.
| Lease type (lessor) | Test | How the lessor accounts for it |
|---|---|---|
| Finance lease | Transfers substantially all the risks and rewards of ownership (e.g. term covers most of the asset's life, or present value of payments is substantially all of fair value) | Derecognise the asset; recognise a lease receivable at the net investment in the lease; recognise finance income over the term |
| Operating lease | Does not transfer substantially all the risks and rewards of ownership | Keep the asset on the balance sheet and continue depreciating it; recognise lease income on a straight-line basis over the term |
Because lessor accounting keeps the finance/operating split, a lease-heavy business can find that the same lease is accounted for very differently by the two sides: the lessee brings on a right-of-use asset and lease liability (single model), while the lessor may treat it as an operating lease and keep the asset on its own books. This asymmetry is a deliberate feature of the standard.
Reassessment and lease modifications
Leases are not static. Ind AS 116 requires the lessee to remeasure the lease liability when certain things change — for example, a change in the lease term (such as becoming reasonably certain to exercise, or not exercise, an option), a change in the assessment of a purchase option, a change in amounts expected to be payable under a residual value guarantee, or a change in future payments resulting from a change in an index or rate used to determine them. The remeasurement generally adjusts the carrying amount of the right-of-use asset (with any excess reduction taken to profit or loss once the asset reaches nil). A lease modification (a change in the scope or consideration of a lease that was not part of the original terms) is accounted for either as a separate lease (where it adds a right of use at a stand-alone price) or by remeasuring the existing lease liability, depending on the nature of the change.
Presentation
In the balance sheet, a lessee either presents right-of-use assets separately from other assets or includes them within the same line as the corresponding underlying assets would be (with disclosure of which line), and presents lease liabilities separately or discloses the line in which they are included. In the statement of profit and loss, the lessee presents interest expense on the lease liability (a finance cost) separately from the depreciation charge on the right-of-use asset. In the cash flow statement, the lessee presents the principal portion of lease payments within financing activities and the interest portion consistently with its policy for other interest paid — a change from the old world, where the whole operating-lease rental sat in operating cash flows. This reclassification improves reported operating cash flow under Ind AS 116.
Disclosure
Ind AS 116 requires extensive disclosures designed to let users assess the effect of leases on financial position, performance, and cash flows. For lessees, these include the depreciation charge for right-of-use assets by class of underlying asset; interest expense on lease liabilities; the expense relating to short-term leases and to low-value asset leases taken under the exemptions; the expense relating to variable lease payments not included in lease liabilities; additions to right-of-use assets; the carrying amount of right-of-use assets by class; and a maturity analysis of lease liabilities (consistent with the liquidity risk disclosures under Ind AS 107). Lessors disclose, among other things, selling profit or loss and finance income on finance leases, and lease income on operating leases, together with a maturity analysis of lease payments receivable.
How Ind AS 116 compares with AS 19
This is one of the most significant differences between the Ind AS and AS frameworks — on the lessee side. The table below summarises it.
| Feature | AS 19 (Leases) | Ind AS 116 (Leases) |
|---|---|---|
| Lessee classification | Finance vs operating lease | No classification — single model for (almost) all leases |
| Operating lease on the lessee balance sheet? | No — off balance sheet; rent expensed straight-line | Yes — right-of-use asset + lease liability recognised |
| Lessee expense pattern | Straight-line rent (operating); interest + depreciation (finance) | Depreciation + interest for all → total expense front-loaded |
| Effect on EBITDA | Operating lease rent reduces EBITDA | Charges sit below EBITDA → EBITDA increases |
| Operating cash flow | Whole rental in operating activities | Principal in financing, interest per policy → operating cash flow improves |
| Lessor accounting | Finance vs operating classification | Broadly the same — finance vs operating retained |
| Exemptions | — | Short-term (≤12 months) and low-value-asset leases |
In short: for a lessee, AS 19 keeps operating leases off the balance sheet (rent expensed straight-line), while Ind AS 116 brings almost all leases on the balance sheet through the single right-of-use model, changing reported assets, liabilities, EBITDA, and the shape of the expense. For a lessor, the two frameworks are broadly similar, both retaining the finance/operating classification.
Common pitfalls
Recurring issues include: failing to identify a lease embedded within a service contract (or the reverse — treating a service as a lease); using an inappropriate discount rate (for example, defaulting to a generic borrowing rate rather than a rate that reflects the lease term and security); omitting amounts that should be in the lease payments (such as residual value guarantees or reasonably-certain purchase options), or including variable payments that should be excluded; applying the short-term exemption to a lease that contains a purchase option (which disqualifies it); depreciating the right-of-use asset over the wrong period; and forgetting to remeasure the lease liability when the term or an index-linked payment changes.
Why this is cleaner on a unified system
Lease accounting under Ind AS 116 is data-intensive: for every lease you need the term, the payments, the discount rate, the resulting right-of-use asset and lease liability, the depreciation schedule, the interest unwind, and the maturity analysis for disclosure — and you need to remeasure when terms change. This is far more reliable when the lease records and the general ledger sit in one connected system, so that each lease's liability roll-forward, depreciation, interest, and cash flow split are generated from a single source of truth rather than maintained in separate spreadsheets and reconciled back to the accounts. When the balance sheet, the profit and loss split (depreciation versus interest), and the cash flow classification all flow from the same underlying lease data, the numbers tie together by construction — exactly the kind of no-reconciliation benefit the unified approach in these guides is built around.
This article is a detailed educational summary of Ind AS 116 in plain language. It is not a substitute for the full text of the standard. Accounting standards are amended from time to time; always verify the current, authoritative text of Ind AS 116 as notified under the Companies Act before relying on it, and consult a qualified chartered accountant for application to your specific circumstances.