Ind AS 116 transformed lease accounting by bringing most leases onto the lessee's balance sheet. Under the old approach, operating leases sat off balance sheet — disclosed but not recognised — which meant a company could control billions of rupees of leased assets and obligations that never appeared in its financial position. Ind AS 116 changed that with a single lessee model under which a lessee recognises a right-of-use asset and a lease liability for almost all leases. This has a major effect on reported assets, liabilities, EBITDA, and financial ratios.
Objective and scope
The objective is to ensure that lessees and lessors provide relevant information that faithfully represents lease transactions. The standard sets out the principles for the recognition, measurement, presentation, and disclosure of leases. A lease is a contract, or part of a contract, that conveys the right to use an asset (the underlying asset) for a period of time in exchange for consideration. At inception, an entity assesses whether a contract is, or contains, a lease — which turns on whether the contract conveys the right to control the use of an identified asset for a period in exchange for consideration.
The single lessee model
The defining feature of Ind AS 116 is that, for the lessee, the old distinction between operating and finance leases is removed. A lessee recognises, for almost every lease:
A right-of-use (ROU) asset — representing its right to use the underlying asset over the lease term; and
A lease liability — representing its obligation to make lease payments.
There are two optional exemptions a lessee may take: short-term leases (12 months or less, with no purchase option) and leases of low-value assets (such as small items of equipment). For these, the lessee may simply recognise the lease payments as an expense on a straight-line (or other systematic) basis, as under the old operating lease approach. For everything else, the asset and liability come onto the balance sheet.
Initial and subsequent measurement (lessee)
At the commencement date, the lease liability is measured at the present value of the lease payments not yet paid, discounted using the interest rate implicit in the lease (or, if that cannot be readily determined, the lessee's incremental borrowing rate). The lease payments include fixed payments, certain variable payments that depend on an index or rate, amounts expected under residual value guarantees, the exercise price of a purchase option if reasonably certain to be exercised, and termination penalties if the term reflects termination.
The ROU asset is initially measured at cost, comprising the initial lease liability, lease payments made at or before commencement, initial direct costs, and an estimate of dismantling/restoration costs.
Subsequently, the lease liability is increased by interest (using the discount rate) and reduced by lease payments — so each payment is split between interest expense and repayment of principal. The ROU asset is generally depreciated (typically straight-line over the shorter of the lease term and the asset's useful life) and tested for impairment. The combined effect is that the total expense is front-loaded (higher in the early years, because interest is higher when the liability is larger) compared with the straight-line rental expense of the old operating lease model — and the expense is split between depreciation and finance cost rather than a single rental line. This also increases EBITDA (since depreciation and interest sit below it), which is a widely noted consequence of the standard.
Lessor accounting
For lessors, Ind AS 116 substantially retains the previous two-model approach: a lessor classifies each lease as either a finance lease (which transfers substantially all the risks and rewards incidental to ownership of the underlying asset) or an operating lease (which does not). A finance lease lessor derecognises the asset and recognises a receivable; an operating lease lessor keeps the asset on its balance sheet and recognises lease income, typically straight-line. So the dramatic change in Ind AS 116 is on the lessee side; lessor accounting is largely unchanged.
Presentation and disclosure
A lessee presents ROU assets either separately or within the same line as the corresponding underlying assets would be (with disclosure), and lease liabilities separately or with disclosure. In the statement of profit and loss, depreciation of the ROU asset and interest on the lease liability are presented separately (interest as a finance cost). In the cash flow statement, the principal portion of lease payments is a financing activity and the interest portion follows the entity's policy for interest paid. Disclosures are extensive, designed to let users assess the effect of leases on financial position, performance, and cash flows — including the carrying amounts of ROU assets by class, interest expense, additions, maturity analysis of lease liabilities, and amounts recognised for short-term and low-value lease exemptions.
A brief illustration
A company leases office space for 5 years at ₹20 lakh per year, with an incremental borrowing rate of 8%. Under Ind AS 116, it recognises a lease liability at the present value of the five ₹20 lakh payments (roughly ₹80 lakh, depending on timing) and an ROU asset of about the same amount. Each year, the ₹20 lakh payment is split between interest (8% on the outstanding liability) and principal repayment, while the ROU asset is depreciated at roughly ₹16 lakh a year (₹80 lakh over 5 years). In year one the total expense (depreciation plus interest) exceeds the old ₹20 lakh straight-line rental, and it declines over the term — the front-loading effect. Under the previous operating-lease approach, the company would simply have expensed ₹20 lakh a year with nothing on the balance sheet.
How Ind AS 116 compares with AS 19
This is one of the largest differences between the frameworks. AS 19 retains the classic distinction for lessees between finance leases (capitalised — asset and liability recognised) and operating leases (off balance sheet — lease rentals expensed, usually straight-line, with disclosures). Ind AS 116 abolishes that distinction for lessees, bringing virtually all leases onto the balance sheet through the ROU asset / lease liability model (subject only to the short-term and low-value exemptions). The effect on a lease-heavy business is dramatic: assets and liabilities rise, the expense profile shifts from a single straight-line rental to front-loaded depreciation-plus-interest, and EBITDA increases. Lessor accounting, by contrast, is broadly similar under both AS 19 and Ind AS 116.
Common pitfalls
Frequent issues include failing to identify that a contract (for example, a service arrangement using a dedicated asset) contains a lease; using an inappropriate discount rate; omitting variable payments linked to an index or rate, or residual value guarantees, from the lease liability; misapplying the short-term/low-value exemptions; and not reassessing the lease liability when the lease term or payments change.
Why this is cleaner on a unified system
Lease accounting under Ind AS 116 requires tracking every lease — its term, payments, discount rate, ROU asset, and liability — and recalculating as terms change, which is far more reliable when lease records and the ledger sit in one connected system. When lease liabilities, the interest/principal split on each payment, and ROU asset depreciation flow through a single source of truth, the balance sheet and profit and loss effects tie together by construction rather than being reconciled from separate schedules and tools.
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.