CA-Final Financial Reporting CA Parveen Jindal Classes

Chapter-4 Ind AS : 116

Leasing Accounting
ȓ*V.V.ImpȔ
*Part 1*

Concept 1 : Applicability & Objective of Ind AS 116

As per the Provisions, Ind AS 116 is mandatory for all Parties (Lessor & Lessee)
W.e.f. 1.4.2019 but Ind AS 17 stands withdrawn from the respective date. There is no
Significant change in the books of Lessor under Ind AS 116, but there are some
Changes in relation to Accounting & Presentation in the books of Lessee under this
Revised Statement.

“The main objective of this statement is to set principles regarding Accounting &
Presentation for Lease contracts in the books of Respective Parties”

Concept 2 : Assets out of Scope of Ind AS 116

As per the provisions of Ind AS 116, the following Assets are not under the scope of
this Statement : -

Assets Covered

A. Mineral oils, ores, Natural Gases or other Non Regenerative Ind AS 106
Resources
B. Patents & Copyrights, contracts for motion Pictures, Manu Ind AS 38
Scripts, video etc.
C. Biological Assets Ind AS 41
D. Service Concession Arrangements Ind AS 115
E. If contracts are made for Granting Licences of Intellectual Ind AS 115
Property Rights

Concept 3 : Exemptions from Application of Ind AS 116 *V.V.Imp

As per the Provisions of Ind AS 116, Lessee can avail Exemption from application of
Ind AS 116 Rules for Lease if any one condition out of following 2 conditions is
Satisfied :-

Condition I : It should be a “Short Term Lease”

OR
Condition II : It should be a “ Low Value Lease”

A. Short Term Lease

If any Lease contract is made for 12 months or Less than 12 months then
Lessee can avail Exemption from application of Ind AS 116 Rules.

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Important Points

Ø If any contract was Classified as Long Term Lease on Commencement date of

Contract, but Subsequently, It is reclassified into short term Lease then there
Will be “ No Exemption” for such type of short Term Lease.
Note : It means that Exemption is available fro original Short term Lease only.

Ø If Lease Contracts have been entered into for similar Assets then such Asset
Will be considered separately for short Term or Long Term Lease
Note : It means that Exemption cannot be availed for Group of Similar Assets. we
Can Group similar Assets only if Same contract has been made for all Assets.

Solution of Q.1 Discussed in Class

B. Low value Lease contracts *Imp

As per the provisions of Ind AS 116, Lessee can avail Exemption from this Statement
if It has Entered into a Lease contract for “Low value Asset”. There is no clear
Explanation on these Assets from the Point of view of value of Assets. The
Following 2 conditions if satisfied then An Asset can be Classified under Low value
Asset : -

Condition I : It should not be dependent or highly inter-related on/with other

Assets from the point of View of its use
Example :
i. Mobile/ Laptop/Tablet : All are not Dependent on other Assets fro use
ii. Tyres of a Car : Tyres are dependent on use of Car
+
Condition II : Lessee can take Benefit from Low value Asset on its own without
Merging it with other sources

Important points

i. An Entity should consider value of New Asset while Assessing Low value Asset
While Assessing Low value Asset under 116 regardless the age of Asset under Lease
ii. If Lease covers multiple Assets of Similar nature then Each Asset will be
Considered as Separate for such Assessment.
Example : If Lease has been made for 200 Laptops then It will be considered as
Low value Lease even if overall amount is very high because Each Laptop
is a Separate Asset and qualify the Specified conditions. It means that
We will not focus on volume of transaction
iii. The Size of business of Lessee or Nature of Business shall not impact such
Assessment.
iv. Ind AS 116 provides some Examples for understanding of Low value Assets :-
Mobiles, Laptops, Tablets, Office furniture etc.

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Concept 4 : Accounting in the books of Lessee if Exemptions are availed

As per the Rules, lessee will write off Lease Rentals during the Lease Period on SLM
Basis or any other Systematic basis in P&L A/c.

Not yet Defined in Ind AS 116

Note : Difference between Actual Payment and SLM Rentals shall be considered as
Prepaid or outstanding Rent.

Example :

LR1 = 20,000 Pass Entries in the books of Lessee assuming

LR2 = 18,000 Lessee has availed Exemptions.
LR3 = 22,000

Solution :
SLM Rent = 20,000 + 18,000 + 22,000 = 20,000
3

Journal Entries :

Ist year
i. Lease Rental a/c Dr 20,000
To Bank 20,000
(Being Rental Paid)
ii. P&L a/c Dr 20,000
To Lease Rental 20,000
(Being Rental written off on SLM Basis)

IInd Year
i. Lease rental a/c Dr 18,000
To Bank 18,000
ii. P&L a/c Dr 20,000
To Lease Rental 18,000
To O/s Rent 2000

IIIrd year
i. Lease rental a/c Dr 22,000
To Bank 22,000
ii. P&L a/c Dr 20,000
O/S a/c Dr 2000
To Lease rental 22,000

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*Part 2*

Concept 5 : Identification of Lease in a contract *V.V.Imp

If all the conditions are satisfied in a contract as Specified in below then we will
Assume that contract contains a Lease Agreement : -

Condition I : There should be an Identified Asset in the contract

+
Condition II : The Customer will obtain Substantially all of the Economic Benefits
From the Asset throughout the Lease Period
+
Condition III : The customer will have right to Direct “How and for what purpose”
The Asset will be used throughout the Lease Period.
OR
Condition IV : If how & for what Purpose is Pre-determined in a contract then
Customer will operate or design the Asset

“If we find ‘yes’ for all above Conditions then we would “ say that contract contains
Lease

Condition I : Identified Asset

As per the Provisions of Ind AS 116, there should be an Identified Asset in the
contract to classify it as a Lease contract. Such an Asset may be Specified in the
Contract “ Explicitily or Implicitily “

Clearly Specified Impression/ Presumption on the basis of facts

(i.e., Asset is Specially customised as per customer
Requirement)

Note : The Specified Asset may be ready on contract date or It will be made available
to customer on a future date, does not affect the concept of identified Asset.

Solution of Q.2 , Q.3 Discussed in Class

Factors to be considered while identification of Asset : -

Factor I : Substantive Substitution Rights with Supplier

If supplier has “SSR” then It will be considered as there is no Identified Asset.

In case the following 2 conditions are satisfied then It will be proved that supplier
has “SSR”

I. If Supplier can Substitute the Leased Asset with other Assets or Alternative
Assets at any time throughout the Lease Period.
Note : It can also be said that customer cannot Prevent supplier from
Replacement of Asset throughout the use of Asset

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+
II. The Supplier has Economic Benefits from the Substitution of Assets

Benefit from substitution Exceed cost of substitution

Note : If any Substitution is required to be made due to warranty provisions then It
Will not be covered under SSR

Exceptions to above Rules :-

1) In case SSR shall become in power on occurrence of some future Events or after
a Specified period, but these rights do not Prevail on Contract date then It will
Be assumed that there are no SSR on Contract date.
Note : These rights should Prevail on contract date

Examples of Future Events

Ø High Rentals from a future Customer

Ø Introduction of New technology in future
Ø Performance of Asset if does not meet as Expected in future etc.

Solution of Q.4 Discussed in Class

Factor II : Identified Asset should be a distinct Asset *Imp

Distinct Asset

Physically distinct Not physically Distinct

It may be Entire Asset or It may be in the form of use of Capacity,

Portion of Asset but It should be “ Substantial all” in the
Period of use
v Substantial All is not defined in Ind AS
116 Approx. 100% .

Solution of Q.5, Q.6 Discussed in Class

Condition II : All Economic Benefits

As per the Provisions of Ind AS 116, Customer shall obtain Substantially all Economic
Benefits from the use of Asset throughout the Period. The Benefit may include the
Following cash inflows :
i. Primary output from the use of Asset
ii. By Products
iii. Commercial Substance (i.e., Rental from Sub-Leasing)

The following factor do not prevent customer from taking Economic Benefits :-

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Ø Supplier Protective Rights : If Supplier imposes any Restriction to avoid damages

To Asset or over consumption of Asset then It does not mean that It will
Affect Economic Benefit Concept.
No. of units to be Produced per day/
Movement of Asset in Risky Areas
Ø Supplier Benefit due to Ownership : If Supplier Gains some Tax Benefits or other
Resources due to ownership and these are not related with use of Asset then It
Will be assumed that Customer still have all Economic Benefits.

Solution of Q.8 Discussed in Class

Condition III : Right to Direct *V.V.Imp

“How & for what purpose”

As per the Provisions, Customer should have right to direct “How & for What Purpose”
the Asset will be used throughout the Period. It can be said that decision making
Rights in relation to Asset should be Excercised by customer. The decision making
Rights may include the following :-

Customer will Decide

When to Produce Where the How the Output whether the

the output output will be will be produced output will be
Produced Produced or Not

Notes :
1) “ How & for what Purpose” should be read as a Single Concept.
2) To Prove the right to direct, It does not require that Asset will be operated by
Customer itself. An Asset can be operated by Personnel of Supplier on customer
Direction.
OR
Condition IV : Operation/ Design of Asset

If “ How & for what Purpose” is Pre-determined in the contract then operation/
Design of Asset should be Excercised by customer Otherwise we will assume that there
is no lease contract.

Solution of Q.9, Q.10 Discussed in Class

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*Part 3*

Concept 6 : Meaning of Lease

As per the Provisions of Ind AS 116, Lease is a contract whereby “ Supplier conveys to
the customer right to control the use of an identified Asset for agreed Period of
time in Exchange of consideration” There are many Issues which are to be
Understood with identification of Lease Contract which are as follows :-

Issue I : Identification of Each Lease component

Issue II : Identification of Non Lease component
Issue III : Combination of contracts
Issue IV : Portfolio Approach
Issue V : Inception Date of Lease
Issue VI : Commencement Date of Lease
Issue VII : Lease Term
Issue VIII : Re-Assessment of Lease Term

Issue I : Separate Lease component

If any Lease contract has been entered into for multiple Assets then
Each Asset will be taken as Separate Lease component if the following conditions are
Satisfied : -

1. Each Asset has its own Benefit

+
2. Each Asset is an Independent Asset (i.e., It is not inter-related with other
Assets)

Note 1 : If conditions for Separate Lease component are satisfied then we will
Account for Each Asset Separately.
Note 2 : If conditions are not satisfied then we will Account for all Asset as a Single
Lease Component.

Issue II : Non Lease Components *V.V.Imp

As per the Provisions of Ind AS 116, It may be possible that there are some
Non Lease components in the contract in the form of maintenance charges, Adm.
Charges etc. for Leased Assets. We should Separate Non Lease components from
Lease components because both have different Accounting Treatments in the books
Of Parties.

Note : We will discuss Accounting for Non Lease components Later.

Allocation of Lease Payment :

As per the Rules, Allocation of Lease Payment over Lease component and Non
Lease component should be made in the Ratio of “ Stand Alone Prices” which would have
been paid if Both components are acquired Separately. In case stand Alone Prices are

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Not available then Estimated maximised values should be used.

Optional Exemption for Lessee

As per the Rules under Ind AS 116, an optional Exemption has been Given to Lessee as
a Practical Expedient as an Accounting Relief that Lessee can Account for Lease &
Non Lease components as a It can also be said that Lessee does not require
Separation of Lease & Non Lease component in a contract.
v Lessor cannot avail this Exemption

Important Note :- As per the Ind AS 116, Property Tax, Insurance or any other fixed
Cost which is Associated with Leased Asset should not be
Considered as Non Lease component. It can also be said that
Variable cost can only be considered as a Non Lease component.

Solution of Q.12, Q.13, Q14, Q.15 Discussed in Class

Issue III : Combination of contracts

If there are multi – contracts with the same party then we can combine all the
Assets under multiple contracts as a “Single Lease component” if following
Conditions are satisfied :-

I. All Assets are Given as a Package +

II. Rent of one Asset is dependent on other Asset +
III. All Assets are Inter- related.

Issue IV : Portfolio Approach

(Accounting Relief )

We can combine Leased Assets even if these Assets are not inter – related with each
Other and Individual Asset has its own Benefits only if these Assets are Similar
Assets.

Issue V : Inception of Lease

As per the Provisions of Ind AS 116, Inception of Lease is relevant for

Identification of a Lease in a contract. It will be as follows : -
a) The date of contract between the parties
Or
b) Mutual consent to Principal terms of contract
Whichever is Earlier

Issue VI : Commencement Date

As per the Provisions of Ind AS 116, Accounting for Lease will be commenced
In the books of Parties from commencement date of Lease.

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It is the date when right to Control the use of Asset is transferred to Lessee.

v Note :
1. It may include Rent free Period also sometimes Possession of Asset is Given to
Lessee before agreed date to make ready the Leased Asset without any Rent.
In the Given case, Actual Possession date is commencement date even if Rent is
Not payable during such Period.
2. It can also be said that Payment date does not affect commencement date.

Issue VII : Lease term *Imp

(Lease Term means Lease Period = Accounting Period)

Calculation of Lease Term *

Non Cancellable Period xxxx

Add : If there is an option for Extension of Non cancellable
Period & Extension is certain from Lessee point of View xxxx
Add : Termination Period if It is certain that Lessee will
Not Exercise it xxxx
xxxx

v Lease term shall not include cancellable Period

Any contract can be considered as cancellable if :-

i. Lessor or Lessee can cancel the contract any time without other Party
Permission
+
ii. Penalty is Nominal

Solution of Q.16 Discussed in Class

Issue VIII : Re-Assessment of Lease Term

As per the Provisions, Lessee should Assess Lease term at the end of each year.
The following factor may affect Lease Term :-

I. If Lessee has made major improvements in Leasehold Property

II. If Lessee has carried major modifications in the Asset
III. If Lessee has taken a business of related Assets
IV. If Lessee has sub –Leased the Leased Asset for beyond its non cancellable
Period
v Lessor will change its Lease term according to Lessee

Solution of Q.17, Q.18 Discussed in Class

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*Part 4*

Issue IX : Lease Payments *Imp

Lease Payment

Part I : For Lessee Part II : For Lessor

It is Calculated for Lessee to It is calculated for Lessor to

Record Asset & Liability record Investments in Lease

ROU Lessor

Part I : Lease Payment for Lessee

Lease payment : - As per the Provisions, Lease Payment is the Amount which is paid
Or Expected to be Paid by Lessee to Lessor during the Lease Period
For use of underlying Asset. It should include : -

I. Fixed Rental (including in Substance fixed Amount) Less Lease Incentive

II. Variable Rental which depends on CPI/ Rate
III. Payment for option of Purchase
IV. Termination Penalties
V. Residual Lease Guarantee

A. Fixed Rentals + Substance fixed – Incentive

a) Fixed Rental :-

It is the fixed Payment which is made by Lessee to Lessor as per contract.

It may remain fixed during the agreed Period or can Increase over the time by fixed
Amount.

b) In Substance it is fixed :-

If increase in rental is mentioned on the basis of variable factors, but in

Substance it is fixed then such increase shall also be considered in fixed rentals.
Ø If there are multiple variables in the contract then we should go for that
Variable which seems to be real.
Ø If there are more than one Realastic variable then we should go for the variable
With minimum Increase.

c) Incentives : -

If any Expense/ Cost to Lessee (i.e., transportation charges, transit Insurance

etc.) is reimbursed by Lessor to Lessee then It should be deducted while computing
Lease Payments on Commencement date.

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Non Lease Components : If Lessee does not avail optional Exemption on Practical
Expedient on Not to Separate Non Lease Components then
“fixed Rentals should not include Payment for Non Lease
Components”.

Solution of Q.19 , Q.20, Q.21 , Q.22

B. Variable Lease Payments

If Lease Payments are based on consumer Price Index/ Market Rental Rate/ Rate of
Interest then the following Points should be considered :

1. On commencement date, Lease Payments should be computed on Prevailing Rates

2. If related factors changes in future then Lease payments shall be re-measured
in relevant Period.

Important Exception

If Lease Payment increases in future due to other factors (i.e., % Share in sales, %
in Profits, Qty Produced etc.) then Such change will be Transferred to P&L A/c in the
Same Period and It will not Affect Lease Payment.

Solution of Q.23, Q25

C. Purchase Option

If it is Certain that Lessee will Purchase the Asset at the end of Lease Period at
Given Price under Purchase option then It will be included in Lease payment on
Commencement date.

D. Termination Penalties

If it is certain that Lessee will pay penalties due to Termination of Lease then It
Will also be included in Lease Payment.

E. Residual Lease Guarantees *Imp

Residual Lease Guarantee is an Expected Amount which is payable by Lessee at the end
Of Lease Period to Lessor due to decrease in value of Asset. It should also be
Considered as Lease Payment on commencement date as follows :-

RLG = Guaranteed value at the end of – Estimated value of Leased Asset at the end
Lease period of Lease period

If Estimated value is more than Guaranteed value then there is no RLG

And It will not be considered in Lease Payment

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*Part 5*

Solution of Q.26 Discussed in Class

Part II : Lease Payment in the books of Lessor

There is only single difference in the books of Lessor in compare to Lessee Books
While computing Lease Payment Which is in relation to residual Lease Guarantee.

Lessor will consider Guaranteed residual Value at full Amount which is Given
By Lessee to Lessor at commencement of Lease.
v Lessee consider RLG to the extent of Estimated payment to be made in Cash.

Explanation on Un-Guaranteed Residual Value

It is Relevant for Lessor only

(It should not be included in Lease Payment)

UGRV = If Lessor Estimates Residual value of Leased Asset at higher Amount than
Amount Guaranteed by Lessee then Diff. will be additional inflow for the
Lessor as “UGRV”. It Prevails only if Lessor Estimation becomes higher than
GRV, but in vice versa situation , Lessor will consider only GRV.

UGRV = Lessor Estimated Residual value – Lessee Guarantees Residual Value

Diff. should be UGRV if it becomes ‘+’

Concept 7 : Discount Rate

As per Ind AS 116, Discount Rate should be identified for identifying

Financing component in the Lease contract. The following Points should be considered
While computing Discount Rate : -

1. It should be computed from Lessor point of View.

2. It should be IRR (Internal / Implicit Rate of Return)
3. It should be computed on the basis of same formula as we use in SFM.

Example :
Compute IRR
Lease Period = 4 Y
Lease Rentals = 5L p.a Lease Payment = 21 L
GRV = 1 L
Lessor Estimated RV = 3L UGRV = 3 L – 1 L = 2 L

Solution :
a) NPV at 10%
Lease Rentals ( 5L x 3.17) 15,85,000
GRV (1L x .683) 68,300

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UGRV (2L x .683) 136600

PV of Inflow 17,89,900
PV of Outflow (16,00,000)
NPV 189,900

b) NPV at 15%
Lease Rental ( 5 L x 2.855) 14,27,500
GRV (1 L x .572) 57,200
UGRV (2 L x .572) 114,400
15,99,100
(16,00,000)
(900)

IRR = Lower rate + LRNPV x Diff

LRNPV – HRNPV
= 10% + 189900 x5
189900 – (-900)
= 14.98%

Meaning of IRR : It is the rate at which present value of Inflow will be equal to
Present value of Outflow.

At IRR = Lease Payment + UGRV = Fair value of Asset on commencement date

Lessor Inflow Lessor outflow

“ Lessee Incremental Borrowing Rate “

If IRR does not provide real position for Interest in books then we replace IRR with
Lessee Incremental Borrowing Rate. It is the rate at which Loan is available to
Lessee in open market for same Period.

Concept 8 : Accounting in the books of Lessee

Step I : Initial Recognition

As per the provisions, Lessee will recognise An Asset & a Liability at the time of
Initial Recognition of Lease in its books on commencement date. The following
Journal Entry will be passed : -

ROU Asset a/c Dr xxxx Unit I

To Lessor a/c xxxx Unit II
(Being initial Recognition made)

v The Recognition of Asset & Liab is Exempted to Lessee for Low value Assets &
Short term Leases.

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Step II : Recognition of Liab. to Lessor

Recognition of Liab to Lessor = Present value of Lease Payments at IRR/IBR

Unit I : Recognition of ROU Asset

As per the Provisions of Ind AS 116, ROU Asset should include the following Amounts : -

Statement Showing Calculation of cost of ROU Asset

i. Present Value of Lease Payment xxxx

+
ii. Initial Direct cost if incurred by Lessee xxxx
(i.e., Commission, Legal fees, Stamp duty etc.)
+
iii. Lease Rentals if paid by Lessee to Lessor before xxxx
Commencement date
(i.e., Rentals during the period in which Asset was
Getting Ready )
+
iv. Provision for Dismantling/ Restoration/ xxxx
Decommissioning Cost
(Refer Ind AS 16)
ROU xxxx

Correct Entry : ROU Asset a/c Dr xxxx (i + ii + iii + iv)

To Lessor A/c xxxx (i)
To Bank A/c xxxx (ii + iii)
To Provision xxxx (iv)
(Being initial Recognition made)

Solution of Q.27

Statement Showing Calculation of Lease Liab.

Year Rental PVF @ 5% Present Value

1. (Advance) 100,000 1 100,000
2. (Advance) 102,000 .952 97104
3. (Advance) 104,040 .907 94364
4. (Advance) 106,121 .864 91689
5. (Advance) 108,243 .823 89084
6. (Advance) 110,408 .784 86560
7. (Advance) 112,616 .746 84012
8. (Advance) 114,869 .711 81672
9. (Advance) 117,166 .677 79321
10. (Advance) 119509 .645 77083
880889

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Entry : ROU Asset a/c Dr 880889

To Liab. 880889
(Being initial recognition made)

Solution of Q. 28

Calculation of ROU Asset

Present Value of Lease Payment 8,50,000

Initial Direct Cost 1000
Rentals before commencement date 10,000
Incentives (50,000)
ROU Asset 811,000

Entry : Bank a/c Dr 50,000

ROU Asset a/c Dr 811,000
To Bank 11,000
To Lessor 850,000
(Being initial Recognition made)

Step II : Subsequent Recognition

Part I : ROU Asset

After initial Recognition, ROU Asset will be Carried in Books under Cost model or
Revaluation model as defined in Ind AS 16. The following Additional points should be
Considered : -

1. The Lessee shall calculate Depreciation on Leased Asset at the end of each year.
2. The Depreciation will be based on full life of Asset or Useful Life during Lease
Period.
Note 1 : If it is certain that Lessee will buy Asset at the end of Lease period then
Full Life should be considered for Dep. Otherwise Lease Period is best option.
Note 2 : If question remains silent then Lease period shall be used.
3. IF method of Depreciation is not Specified then we will prefer “SLM”.

Part II : Liab. To Lessor

As per Ind AS 116, Liab to Lessor will be dealt as a Normal Liability. We will Accrue
Interest and will record Payment as follows : -

Statement Showing Liab. To Lessor (After Initial Recog.)

Year Opening Balance Interest Payment Closing Balance

In Liab.
(I) (II) (III) (IV) (V)
(III = II x IRR) (II + III –IV)

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Entries :

a) Interest a/c Dr xxxx

To Lessor A/c xxxx
(Being Interest Accrued)
b) Lessor a/c Dr xxxx
To Bank xxxx
(Being Payment made as per contract)
c) Dep. a/c Dr xxxx
To ROU xxxx
(Being Dep Charged)
d) P&L a/c Dr xxxx
To Interest xxxx
To Dep xxxx
(Being Expense written off)

*Part 6*

Solution of Q.30

Step I : Initial Recognition

Calculation of P.V of Lease Payments :-

Y1 20000 .893 17860
Y2 30000 .797 23910
Y3 50000 .712 35600
77370
Entry : ROU Asset a/c Dr 77370
To Lessor Liab. A/c 77370
(Being initial Recognition made)

Step II : Subsequent Recognition

a) Accounting for ROU :

Year Opening Balance Deprn (SLM) Closing Balance

1 77370 25790 51580
2 51580 25790 25790
3 25790 25790 -

b) Accounting for Lessor Liab. : -

12%
Years Opening Interest Payments Closing
Balance Balance
(I) (II) (III) (IV) (V)
(II + III – IV)
1 77370 9284 (20000) 66654
2 66654 7998 (30000) 44652

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3 44652 5348 (50000) -

(Bal fig)

Journal Entries : Ist Year

1) ROU Asset a/c Dr 77370

To Lessor 77370
(Being Initial Recognition made)
2) Interest a/c Dr 9284
To Lessor A/c 9284
(Being Interest Accrued)
3) Lessor a/c Dr 20000
To Bank 20000
(Being Lease payment made)
4) Depreciation on ROU Asset a/c Dr 25790
To ROU Asset 25790
(Being Depreciation Charged)
5) P&L a/c Dr 35074
To Interest 9284
To Depreciation 25790
(Being Exp. written off)

Notes to A/c’s

a) ROU Asset Initial I II III

At the end of year 77370 51580 25790 -
b) Liability
At the end of Year 77370 66654 44652 -
c) Expenses for each year
Dep. - 25790 - -
Int. - 9284 - -
35074

Solution of Q.31 *Imp

Step I : Initial Recognition

Calculation of P.V of Lease Payments : -

Years Lease Payments PVF @ 90.4% Present Value

1. 500000 1 500000
2. 315000 * .917 288855
3. 530450 .841 446108
4. 546364 .771 421247
5. 562754 .707 397867
6. 579637 .649 376184
7. 597026 .595 355230
8. 614937 .546 335756
9. 633385 .500 316693

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10. 652387 .459 299446

(I) 3737386
Add : PV of option (II) Purchase price at the end
Of 1oth Year (30,00,000 x .421) 1263000
PV of LP 5000386
Or 50,00,000 (Round off)
[*(500000 + 3%) – 200000]

Step II : Subsequent Recognition

I. Accounting for ROU Asset :

We will calculate Dep. On the basis of Economic Life (40Y) which is full Life for
Leased Asset because It is certain that Lessee will purchase the Asset at the end of
Lease Period.

Year Opening Balance Dep. (40Y) Closing Balance

1. 5000000 125000 4875000
2. 4875000 125000 4750000
3. 4750000 125000 4625000
4.
5.
6.
7. H.W
8.
9.
10.

II. Accounting for Lease Liab : -

Year Opening Int @ 9.04% Payment Closing Balance

Balance
1. 50,00,000 - 500000 45,00,000
2. 45,00,000 406800 315000 45,91,800
3. 45,91,800 415099 530450 44.76,449
4. Beginning 44.76,449 404671 546364 43,34,756
5. 43,34,756 391862 562754 41,63,864
6. 41,63864 376413 579637 39,60,640
7. 39,60,640 358042 597026 37,21,656
8. 37,21,656 336438 614937 34,43,157
9. 34,43,157 311261 633385 31,21,033
10. 31,21,033 282141 652387 27,50,787
10th End 27,50,787 249213 30,00,000 NIL
(Bal Fig)

Step III : Re- measurement of Lease Liab. *V.V.Imp

As per the provisions of Ind AS 116, Re-measurement of Lease Liab. May take place

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Due to change in terms of Lease Payment. The following points may be considered in
Relation to Re-measurement of Lease Liability : -

1. There may be four main reasons for change in Lease Liab. Which are as follows : -
Ø Change in Lease term
(It may be extended due to Renewal option or It may be due to Early termination)
Ø Change in Decision of Purchase option
Ø Change in Guarantee Residual value
Ø Change in Rentals due to CPI/IR

2. If re-measurement takes place due to change in Lease Term or Purchase option

Then these Reasons shall have “Significant impact” on Lease Payments due to
Which Discount Rate will be revised on Such date.

3. If Re-measurement in Liab takes place due to change in GRV or CPI then these
Changes shall not have significant Impact on Lease Payments due to which we can
Use original Discount rate without any Change.

4. Re-measurement :-

Present value of Lease Payments as per New terms on re-measurement date xxxx
Carrying amount of Lease Liab in the books as per original Terms on
Re-measurement Date (xxxx)
B/S value Difference + xxxx

It will be transferred to ROU Asset

1) If Liab. Increases : ROU Asset a/c Dr xxxx

To Lessor xxxx
2) If Liab. Decreases : Lessor a/c Dr xxxx
To ROU Asset xxxx

Solution of Q.32

Step I : Initial recognition

P.V of Lease Payments without Renewal option :

Years Rentals PVF @ 5% Present value
1. 100000 1 100000
2. 100000 .952 95200
3. 100000 .907 90700
4. 100000 .864 86400
5. 100000 .823 82300
PV of LP 454600

Entry : ROU Asset a/c Dr 454600

To Lessor 454600
(Being initial Recognition made)

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Step II : Subsequent Recognition

a) ROU Asset :

Years Opening Balance Dep. 5y Closing Balance

1. 454600 90920 363680
2. 363680 90920 272760
3. 272760 90920 181840

b) Liab to Lessor :

Year Opening Balance Interest 5% Payment Closing Balance

1. 454600 - (100000) 354600
2. 354600 17730 (100000) 272330
3. 272330 13617 (100000) 185947

Step III : Re-Measurement

A. Present Value of New Lease payment on Re-measurement date : -

Year L.P PVF @ 6% Present Value

Y1 *104000 1 104000
Y2 104000 .943 98072
Y3 114400 .890 101816
Y4 114400 .840 96096
Y5 114400 .792 90605
490589
*100000 + 4% = 104000
*110000 + 4% = 114400

B. Diff. between Revised Liab & Original Liab :-

Revised Liab. 490589

Original Carrying Amount (185947)
Increase * 304642

v It will be capitalised to ROU as follows :

ROU Asset a/c Dr 304642
To Lessor Liab 304642
(Being Re-measurement of Liab made)

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Step IV : Modifications in the Contract

Modifications

Unit I : Unit II :
It Should be treated as a It should be treated as modification
Separate contract. To existing Contract

Re-Measurement Vs Modifications

If Changes in Lease Liability take place due to Pre-existing conditions in the

Contract then It will be considered as re-Measurement but changes in Lease Liability
Due to New Terms which were not Earlier in the contract then It will be considered
as modification.

As per Ind AS 116, Lease Modification may be due to following Reasons : -

1. Change in Consideration
2. Change in Scope of Lease Area +
Area -
3. Change in Lease period Extension
Termination

Unit I : Modifications as a Separate Contract * Imp

We can consider modification as a Separate contract only if the following 2

Conditions are satisfied : -

1) Modification should be in relation to increase in Scope of Lease contract

+
2) Lease Payment for such increase should be at its stand Alone Price

In the Given case, we will not change Lease Liab. Of original Existing contract but we
Will recognise such increase in scope of Lease as a new contract.

Solution of Q.33 Discussed in Class

Unit II : If modification is considered as a change in Existing contract

Cases

I II
If Increase in Scope of Lease has If Scope of Lease is Decreased in
Been made for Lease Term/Area the form of Lease Term/Area
OR
Changes in consideration

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Case I : If Scope of Lease is increased or consideration is changed

Step I : Calculate Present value of Lease Liab. As per modified terms on modification
Date
Step II : Calculate book value of Lease Liab. Under Original contract on modification
Date
Step III : Step I –Step II = It will be transferred to ROU Asset
(+-)

v Under modified Terms, Discount factor will always be revised.

New rate on Modification date

*Part 7*

Solution of Q.34

Step I : Calculation of Lease Liab as per Revised Terms on modification Date

Period Lease Payment Annuity factor @7% P.V of Revised Lease

for 8 months Liab.
7-14 Y 100,000 P.a. 5.971 597100

Step II : Calculation of Carrying Amount of Lease Liability as per Original

contract On modification date

A. Initial Recognition :
1-10Y 100000 P.a 7.360 736,000

Journal : ROU Asset a/c Dr 736000

To Lease Liab. 736000
(Being Asset recognised)

B. Subsequent Recognition :-

a) Lease Liab :

Period Opening Balance Interest (6%) Payment Closing Balance

1 736000 44160 (100000) 680160
2 680160 40810 (100000) 620970
3 620970 37258 (100000) 558228
4 558228 33494 (100000) 491722
5 491722 29503 (100000) 421225
6 421225 25274 (100000) 346499
7 346499

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b) ROU Asset :
Initial Recognition 736000
Dep. For 6 years (736000/10 x 6) (441600)
Book Value (7th OB) 294400

Step III : Modification Impact on Lease Liab.

Modified Liab as per Revised Terms 597100

Carrying Amount as per original Terms (346499)
Increase in Liab 250601

Entry : ROU Asset a/c Dr 250601

To Lease Liab 250601
(Being Lease Liab. Revised)

Revised ROU Asset = 294400 + 250601 = 545001

It will be depreciated over 8 years during

Revised Lease period

Solution of Q.36

Step I : Calculation of modified Lease Liab.

Period Lease Payment Annuity @7% for 5 years Present val. of Lease Liab

6-10 95000 P.a. 4.100 389500

Step II : Calculation of Carrying Amount of Lease Liab

(In the beginning of 6th Year)

A. Initial Recognition

1-10Y 100000 P.a. 7.36 @ 6% for 10 year 736000

B. Carrying Amount :

Period Opening Balance Interest Payment Closing Balance

1 736000 ü ü ü
2
3 H.W
4
5
6 412225

Step III : Modification Impact on values

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Modified Lease Liab 389500

Carrying Amount of Liab (421225)
Reduction in Lease Liab. (31725)

Entry : Lease Liab a/c Dr 31725

To ROU Asset 31725
(Being Liab. Reduced)

Case II : Accounting for decrease in scope of Lease *Imp

Step I : Calculate carrying Amount of Original Contract on Modification Date

Liab & ROU

Step II : Calculate Profit/Loss on Proportionate Surrendered/ Reduced Portion
Under decrease in scope of Contract
Step III : Calculate Increase/ Decrease in Lease Liability due to change in Terms of
Continuing Portion of Lease Contract

Note : In case, Increase & Decrease are given in a contract together then we will
Adjust decrease in Scope first then we will consider Increase in Scope.

Solution of Q.35

Step I : Calculation of carrying Amount of Lease Liab. & ROU Asset

( In the beginning of 6th Y)

A. Initial Recognition :

1 – 10Y 50,000 P.a. 7.36 @ 6% For 10 years 368000

B. Subsequent Recognition :
Liab.
Period Opening Balance Interest (6%) Payment Closing Balance
1 368000 22080 (50000) 340080
2 340080 20405 (50000) 310485
3 310485 18629 (50000) 279114
4 279114 16747 (50000) 245861
5 245861 14752 (50000) 210613
6 210613

Asset 368000 – (36800/10 x5) = 184000

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Step II : Accounting for Decrease in Scope of Lease

Lease Liab ROU Asset

Carrying Amount 210613 Carrying Amount 184000

Surrendered Portion (105306) Surrendered Portion (92000)
(210613/5000 x 2500) (184000/5000 x 2500)
Continuing Portion of Lease 105307 Continuing Portion 92000

Entry : Lease Liab a/c Dr 105306

To Asset 92000
To P&L (Bal) 13307
(Being Cancellation of contract made for 2500 aq. Meters)

Step III : Modification impact on Lease Liab

Modified Lease Liab. (30,000 x 4.329) 129870

Carrying Amount for Cont. Portion (105307)
Increased in Liab. 24563

ROU Asset a/c Dr 24563

To Lease Liab. 24563
(Being ROU & Liab Increased due modification for continuing Portion)

Solution of Q.37 V.V.Imp

I. Initial Recognition
(Original Lease)

P>V of Lease Liability (100000 x 7.36) @ 6% for 10 years 736000

Journal : ROU Asset a/c Dr 736000

To Lease Liab. 736000
(Being initial Recognition made)

II. Statement Showing Balance in Lease Liability

Period Opening Balance Interest @ 6% Payment Closing Balance

1 736000 44160 (100000) 680160
2 680160 40810 (100000) 620970
3 620970 37258 (100000) 558228
4 558228 33494 (100000) 491722
5 491722 29503 (100000) 421225
6 421225*

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III. Calculation of Balance in ROU Asset in the beginning of 6th Year

Initial Recognition 736000

Depreciation (736000/10y x 5y) (368000)
Book Value in the beginning of 6th year 368000

IV. Modification in Original Contract

a) Decrease in Leased Period (from 10Years to 8 Years)

i. P.V of Lease Liab for Original Contract

6th 100000 .943 94300

7th 100000 .890 89000
8th 100000 .840 84000
267300
Kept
ii. Changes/ Decrease in Original Liab. = 421225 – 267300
= 153925
To be Cancelled

iii. ROU to be cancelled = 368000 – (368000/5 x 3)

= 368000 – 220800
= 147200 To be cancelled

Entry : Lease Liab. a/c Dr 153925

To ROU Asset 147200
To Gain (Bal) 6725
(Being Scope of Lease reduced from 10y to 8y)

V. Re-Measurement of Original remaining contract

P.V of Lease Liab @ 7% for 3 years 262400

100000 x (.935 + .873 + .816)
Present Lease Liab @ 6% (267300)
Reversal of Liab 4900

Lease Liab a/c Dr 4900

To ROU Assets 4900

Revised Liab = 267300 – 4900 = 262400

ROU Revised = 220800 – 4900 = 215900

VI. Additional Liab for 1500 Sq. mtr

7%
P.V of Additional Liab = 50000 x 2.624 = 131200
ROU A/c Dr 131200
To Lease Liab. 131200
( Being Additional Liab booked)

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Revised ROU = 215900 + 131200 = 347100

Revised Liab = 262400 + 131200 = 393600

Concept 9 : Accounting in the books of Lessor

As per the Provisions of Ind AS 116, Lessor shall classify the Lease contract
Into one of following contracts before making any Recognition in the books : -
A. Operating Lease (Rental Model)
B. Finance Lease (Interest Model)

Meaning of Operating Lease : If any Lease cannot be Specified as a Finance Lease

then It should be Classified as an Operating Lease.

Meaning of Finance Lease : As per the rules, Finance Lease is a contract whereby
Lessor Transfer all risks & rewards to Lessee incidental to Ownership. The following
Indications can be considered (At Least one Indication) to Classify an Agreement
Under Finance Lease :-
More than 50%
I. If Lease Period covers major part of Useful Life of Leased Asset
OR
II. If there is an option with Lessee to Purchase the Leased Asset at the end of
Leased Period
OR
III. If Lessee is bound to acquire the Leased Asset at the end of Lease Perio
OR
IV. If Present value of Lease Payment becomes equal to or higher than fair
Value of asset
OR
V. If Nature of Asset is relevant for Lessee only

Additional Inicators those may lead to Finance Lease : -

Ø If Lease is Non- cancellable

(Note : Lessee will bear all Loses due to Cancellation of Lease)
Ø If Lessee can Extend the Lease Period at Lower Rates
Ø If Lessee has option to Purchase below the market Rates

*Part 8*

Unit I : Accounting for Finance Lease

Step I : Initial Recognition

As per the Provisions of Ind AS 116, Lessor will Derecognise “Asset” which is Given on
Lease, but will recognise “Lease Receivables” on Commencement date.

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Journal Entry

Lease Receivables a/c Dr xxxx

To Asset xxxx
(Being initial Recognition made) Carrying Amount
Net Investments

v Diff. in Carrying Amount & N.I. will be considered as Profit or Loss on Transfer
Of Asset & It will be transferred to P&L A/c.

v Meaning of N.I. Present value of *Gross Investment at IRR

v Meaning of G.I “Lease Payment + UGRV”

Gross Inflow

v Note : If we discount G.I at IRR then N.I will be equal to fair Value of Asset

Step II : Subsequent Recognition

After Initial Recognition, the following Entries shall be recorded each year :-
a) Lease Receivables a/c Dr xxxx
To Interest Income xxxx
(Being Int. made due0
b) Bank a/c Dr xxxx
To Lease Receivables xxxx
(Being Collection made)
c) Interest Income a/c Dr xxxx
To P&L xxxx
(Being Interest transferred to P&L as an Income)

Solution of Q.38

Step I : Initial Recognition

Calculation of Net Investment

Lease P.V of Lease Rentals (15,000 x 6.124) 91860

Payment P.V of GRV (30000 x .383) 11490
+
UGRV P.V of UGRV (20000 x .383) 7660
G.I. N.I 111010
N.I
Journal : Lease Receivables a/c Dr 111,000 (Round off)
To Asset 100,000 Carrying Amount
To Gain on transfer 11,000
(Being initial Recognition made)

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Step II : Subsequent Recognition

a) Table Showing Finance Income

Period Opening Balance Interest Collection Closing Balance

(10.078%)
1 111000 11187 (15000) 107187
2 107187 10802 (15000) 102989
3 102989 10379 (15000) 98368
4 98368 9914 (15000) 93282
5 93282 9401 (15000) 87683
6 87683 8837 (15000) 81520
7 81520 8216 (15000) 74736
8 74736 7532 (15000) 67268
9 67268 6779 (15000) 59047
10 59047 5951 (15000) 49998

GRV + UGRV

At the end of Lease Term

If Lessee returns the Asset If Lessee retains the Asset

Asset a/c Dr 49998 Cash/Bank a/c Dr 49998

To Receivable 49998 To Receivable 49998

Step III : Modifications

As per Ind AS 116, Lessor Recognises Net Investments as Lease Receivables for Lease
Contracts under Finance Lease. In case any modification takes Place in Lease
Contract then It will be treated as modification in financial Asset and It will be
Accounted as per Ind AS 109.

Step IV : If Lessor is a manufacturer or Dealer

If Lessor is a manufacturer or dealer then Lessor will calculate Total Profit from
the Transaction under 2 headings as follows :-

Normal Profit = fair value of Inventory - Cost of Inventory

Ind AS 115 N.I /P.V of GI

Outright Revenue

Interest Income = Gross Invest. – N. Investment

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Example :

a) Cost per car : 150000

b) Normal Selling Price : 180000
c) Lease Rentals : 37500 P.a
d) GRV : 22500
e) IRR : 16%
Calculate Profit & Finance Income

Solution :

Step I : Calculation of Normal Profit

Normal Profit = NSP – Cost

= 180000 – 150000 Receivable a/c Dr 180,000
= 30000 To Sales 180,000

Step II : Calculation of F.I

Period Opening Balance Interest (16%) Collection Closing Balance

1 180000 0 37500 142500
2 142500 22800 37500 127800
3 127800 20448 37500 110748
So on

Unit II : Accounting for Operating Lease

Under Operating Lease, Lessor recognises collections from Lessee as

Rental Income in P&L A/c on SLM Basis. If Actual Collection differs from SLM Rent
then Diff. will be recognised as Advance Income/ Outstanding Income.

Example :
Lease Period = 3Y
Lease Rentals = 1y = 60000
2y = 40000
3y = 20000
Pass Journal Entries assuming it as an OL

Solution :

SLM Rent = 60000 + 40000 + 20000 = 40000

3

Ist Year :
i. Bank a/c Dr 60000
To Lease rental 60000
(Being Rental received)

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ii. Lease Rental a/c Dr 60000

To PL 40000
To A. Rent 20000
(Being Income Recog.)

IInd Year
i. Bank a/c Dr 40000
To Lease Rental 40000
ii. Lease Rental a/c Dr 40000
To PL 40000

IIIrd Year
i. Bank a/c Dr 20000
To Lease Rental 20000
ii. Lease Rental a/c Dr 60000
A. Rent a/c Dr 20000
To PL 40000

Modification in OL

If modification is made in OL contract then It will be considered as a new contract

From such date & SLM Rent will be Revised from such date.

*Part 9*

Concept 10 : Sub-Lease Transactions

C Sub-Lessee
A B
A

Lessor Lessee

Sub Lease
Lease Sub-Leases
Head Contract Leased Asset
Lease
Intermediate Lessor/ Sub-Lessor

As per the Provisions of Ind AS 116, Accounting for Sub- Lease contracts
Will be based on Nature of Head Lease. The following 2 cases shall be considered for the
Accounting of Sub-Lease contracts in the books of Original Lessee/ Intermediate
Lessor :-
Cases

If Head Lease is an If Head Lease is Long Term

Exempted Lease/ Operating Lease Lease/ finance Lease

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Treatment in Case I

If Head Lease is an Operating Lease then sub Lease shall also be considered as an
Operating Lease. It means that Rental Income from sub Lease shall be recognised
on SLM Basis over the Lease Period. The original Lessee will pay Rentals in original
Contract, but will collect rentals in Sub Lease contract. We cannot offset the Lease
Rentals under original & Sub Lease contract in Intermediate Lessor bools because
Both the contracts are Separate contracts.

Treatment in Case II

If Head Lease ia a finance Lease then original Lessee/ intermediate Lessor shall
Consider the following points :-

1) First of all, Sub lease contract will be Classified under FL/OL based on facts in
Sub Lease contract.
2) If Sub- Lease contract is classified as an operating Lease then Intermediate
Lessor shall follow “Rentals on SLM” model without derecognising any ROU Asset.
3) If Sub Lease contract is classified as a finance Lease then we will de-recognise
The ROU Asset and will recognise the Net Investments as Follows :

N. Investments /receivable a/c Dr xxxx P&L

To ROU Asset xxxx
(Being Initial Recog. Made)

Solution of Q.9 ,Q.40, Q.41

Concept 11 : Sale & Lease Back Transaction *Imp

Lessee Lessor
Lease Back same Asset to
Mr. A Mr. B

Seller Buyer
Sells an Asset

Under Sale & Lease Back Transactions, we have to Understand Accounting Aspects
in the books of Lessor & Lessee Separately as Follows : -

Unit I : In the books of Lessee

In the books of Seller/ Lessee, the following steps shall be applied while making
Accounting Adjustments for sale & Lease back transactions : -

Step I : First of all, Profit or Loss on Sale of Asset will be computed by seller as
Follow : -
Seller P/L = Selling Price – Carrying Amount

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Step II : Calculate Present Value of Lease Liability as per Lease contract

Lessee

Step III : Calculate carrying Amount which is retained by Lessee in Lease contract in
The form of ROU as follows :

Carrying Amount x P.V of Lease Liab. = C. Amt to be retained

Selling Price

Step IV : Carrying Amount to = Carrying Amount - Step III

be Transferred

Step V : Profit/Loss to be Recognised = Total Profit/Loss x Step IV

Carrying Amount

Example :
i. Carrying Amount = 10,00,000
ii. Selling Price = 15,00,000
iii. P.V of Liab. = 850,000
Calculate Profit to be Recognised on Sale & Lease back Transaction.

Solution :

Step I : Calculation of Profit on Sale of Asset

Profit = 15,00,000 – 10,00,000 = 500,000

(SP) (CA)

Step II : Calculation of P.V of Liab.

Given in Question

Step III : Carrying Amount of Asset to be Retained

Carrying Amount to be Retained = 10,00,000 x 850,000 = 566,667

15,00,000
Step IV
Carrying Amount to be Transferred = 10,00,000 – 566,667 = 433,333

Step V : Profit to be Recognised

Profit = Total Profit x C. Amount transferred

Carrying Amount
= 500,000 x 433,333 = 216,667
10,00,000

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Journal

Bank a/c Dr 15,00,000 (SP) 2066667

ROU Asset a/c Dr 566,667 (CA. Retained)
To Asset 10,00,000 (C. A)
To Lease Liab. 850,000 (P.V) 2066667
To Profit 216,667 (Transferred)

Note : It means that ROU will be recognised at Original Carrying Amount instead of
P.V of Lease Liab under sale & Lease Back Transaction

Exceptional Cases

Case I : If Selling Price Exceeds fair Value

Case II : If selling Price becomes Lower than fair value

Case I : If selling Price Exceeds fair value

Step I : In the Given Case, Selling Price will be Reduced to fair value of Asset &
Calculation of Profit/Loss on Sale of Asset will be computed as follows :

Profit/Loss = fair value of Asset – Carrying Amount of Asset

(Note : Difference in SP & FV will be recognised as a Separate Liab.)

Step II : Calculate P.V of Lease Liab. As per Lease contract and Split it in 2 Parts
as follows :

P.V of Lease Liab

Additional Obligation (Step I) Normal Lease Payments

Additional Obligation x Lease Normal Lease Payment x Lease

P.V of Lease Liab Rental P.V of Liab Rental

Step III : Calculate carrying Amount of Asset which is to be retained & transferred
as follows : -
i. Retained = Carrying Amount x P.V of Normal Lease Payments
Fair value
ii. Returned = Total Carrying Amount – Retained Carrying Amount

Step IV : Profit to be Recognised = Profit/Loss x Returned C. Amount

Carrying Amount

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Solution of Q.42

Step I : Profit/Loss on sale of Asset

Profit = Fair Value of Sold Asset - Carrying Amount

= 27,00,000 - 15,00,000
= 12,00,000
( Note : Advance Liab will be recognised at 300000 for diff. in selling Price & fair value)

Step II : Calculation of P.V of Lease Liab.

P.V of Liab = 200,000 x 7.469 = 14,94,000

(Round off)

Advance Liab. ROU Asset

300,000 11,94,000

Step III : Carrying Amount to be transferred or Retained

i. Retained = 1500000 x 1194000 = 663333

2700000
ii. Transferred = 1500000 – 663333 = 836667
iii. Profit to be Recog. = 1200000 x 836667
1500000
= 669334

Journal :

Bank a/c Dr 30,00,000 36,63,333

ROU a/c Dr 663,333
To Adv. Liab 300,000
To Lease Liab. 11,94,000 36,63,333
To Asset 15,00,000
To P&L 669,333

*Part 10*

Case II : If Selling Price becomes Less than fair value

Step I : Calculate Profit/Loss on sale of Asset as follows : -

Profit/Loss = * fair value of sold Asset – carrying Amount of sold Asset

We have increased selling Price

v Diff. between fair value & selling price will be considered as Pre-payment of Lease
Liab.

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Step II : Calculate P.V of Lease Liability and increase it by adding prepayment of

Lease liability.

Step III : Asset Retained = Carrying Amount x P.V of Liab

Fair value
Asset transferred = C. Amount – Asset retained

Step IV :Profit/Loss to be Recognised = P/L x Asset transferred

C Amount

Solution of Q.42

Assumption : If S.P. is 25L

Step I : Profit/Loss on sale

P/L = Fair value – carrying Amount Prepaid Balance

= 2700000 – 1500000 = 27L - 25L = 2L
= 12,00,000

Step II : P.V of Lease Liab.

P.V of Lease Liab. (Refer Previous solution) 14,94,000

Prepayments 200,000
16,94,000

Step III : Asset Retained & Transferred

i. Asset Retained = 1500000 x 1694000 = 941111

2700000
ii. Asset Transferred = 1500000 – 941111 = 558889

Profit to be recognised = 1200000 x 558889 = 447111

1500000

Journal

Bank a/c Dr 25,00,000

ROU Asset a/c Dr 941,111 36,41,111
Prepayments a/c Dr 200,000
To Asset 15,00,000
To L. Liab 16,94,000 36,41,111
To PL (profit) 447,111
(Being Initial Recog. Made for Sale & Lease Back Transaction)

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Unit II : In the books of Lessor

Step I : In the books of Buyer/Lessor, Initial Recognition for Purchase of Asset will
be made as per Ind AS 16 : PPE at fair value.
(Diff. between fair value & Payment will be Adjusted o/s or Advance)

Step II : After Initial Recognition, Lease transaction will be recognised as per Ind
AS 116

Q.42 : SP =30L Q.42 : SP = 25L

Asset a/c Dr 27 Asset a/c Dr 27

Advances a/c Dr 3 (Bal fig) To Bank 25
To Bank 30 To o/s 2
(Being Initial recognition) (Being Initial Recognition made)

Concept 12 : Transitional Provisions *V.V.Imp

If Lessor & lessee already have a Lease contract in their books under Ind AS 17 on
the date of Application of Ind AS 116 then we have to adjust the balances from
Ind AS 17 to Ind AS 116 under transitional Provisions.

Unit I : Transition in the books of Lessee

Under Ind AS 17, there may be 2 type of Leases with the Lessee as follows :
i. Operating Lease
ii. Finance Lease

Part A : Operating Lease

Transition

Lessee has an operating Lease under

Ind AS 17

If Such Lease is an Exempted If Such Lease is not an Exempted

Lease under Ind AS 116 Lease under Ind AS 116

No transition is required Transition is Required

Full Retrospective Modified Retrospective

Approach Approach

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Concept A : Full Retrospective Approach *V.V.Imp

Under this Approach, we Calculate ROU & Liability at the beginning of Preceding year
Assuming it Ind AS 116 had been applying Since from the very beginning of contract.
It means that we adjust position of Lease contract in B/S in Current year
as well as in comparative statements as per Ind AS 116.

Solution of Q.43

a) Initial & Subsequent Recognition if 116 is Applied under full Retro. Approach

i. P.V of Lease Liab : 200,000 x 2.402 = 480400

ii. Lease Liab : Subsequent Recognition
Period Opening Balance Interest Payment Closing Balance
2017-18 480400 57648 (200000) 338048
2018-19 338048 40566 (200000) 178614
2019-20 178614 21386 (200000) NIL
(Bal)

iii. ROU : Subsequent recognition

Period Opening Balance Dep (3Y) Closing Balance
2017-18 480400 160133 320267
2018-19 320267 160133 160134
2019-20 160134 160134 -

Journal :

1.4.2018 : ROU a/c Dr 320267

Retained Earning a/c Dr 17781 (Bal)
To Liab. 338048
(Being Transition made from Ind AS 17 to Ind AS 116)

31.3.2019 : Interest a/c Dr 40566

To Liability 40566
(Being Interest made due on Lease Liab.)
Depreciation a/c Dr 160133
To ROU Asset 160133
(Being dep. Charged)
Liab. a/c Dr 200,000
To Bank 200,000
(Being Lease Payment made)

31.3.20 : Interest a/c Dr 21386

To Liab. 21386
Dep a/c Dr 160134
To ROU 160134
Liab. a/c Dr 200000
To Bank 200000

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Concept B Modified Approach

Alternative I : Under this Approach, we will not adjust comparative Statements,

but we will discount the Lease Liability which is Payable after
1.4.2019 only. The Lessee will recognise ROU & Lease liability at
Discounted value as Specified in above.

Solution of Q.43

a) Calculation of P.V of Liab. As on 1.4.2019

P.V of Lease Payment after (200000 x .909) = 181800

1.4.2019 : ROU a/c Dr 181800

To Lease Liab 181800
(Being initial Recog. Made)

31.3.20 : Interest a/c Dr 18180 (181800 x 10%)

To Liab 18180
Dep. a/c Dr 181800
To ROU 181800
Liab. a/c Dr 200000
To Bank 200000

Alternative II : under this Approach, the following Points should be considered for
Transaction from Ind AS 17 to Ind AS 116 : -

1) The Calculation of Lease Liab. Will be made as in Alternative I for Payments after
1.4.2019.
2) The Calculation of ROU on transaction date can be made by discounting Rate on
Transition date assuming that It would have been there in Normal situation.

i. P.V of Lease Liab. = 200000 x .909 = 181800

ii. ROU = (200000 x 2.487) = 497400 – (497400/3 x 2)
= 165800
10%

1.4.19 : ROU Asset a/c Dr 165800

R.E a/c Dr 16000 (bal)
To Lease Liab. 181800
(Being Transition made)
31.3.20 : Interest a/c Dr 18180
To Lease Liab 18180
Lease Liab. a/c Dr 200000
To Bank 200000
Dep. a/c Dr 165800
To ROU 165800

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Part B : If Lessee has finance Lease under Ind AS 17

There will be no transition for finance Lease. It means that carrying amount
Of Leased Asset and Liab. To Lessor shall be continued from Ind AS 17 to Ind AS 116.

Unit II : Transition in the books of Lessor

All the concepts are same under Ind AS 17 & Ind AS 116 for the books of
Lessor due to which there will be no transition in this case.

*Part 11*

Solution of Q.1 ,Q.2, Q.3, Q.4, Q.5 Discussed in Class

Concept 13 : Presentation & Disclosures in financial Statements

Disclosures

I. Quantative II. Qualtitative

Relevant for students for Relevant Practically for

Exam Purpose Annual Reports

Unit I : Disclosures for Lessee

Part A : Disclosures for Non Exempted Leases

A. Balance sheet :
i. ROU Asset should be disclosed Separately from other Assets
ii. Lease Liab. Should also be Presented as a Separate Liab. From other Liabilities.

B. P & L Statement :
i. Depreciation on ROU Asset should be included in Dep & Amortisation Exp.
ii. Interest Exp. on Lease Liab. Should also be included in finance Cost
iii. Income from Sub- Leasing should be Included in other Income

OL : SLM Rent FL : Int

iv. Profit/ Loss on Sale & Lease back Transactions.

Other Income Other Exp.

v. Variable Lease Payments should also be included in Expense
Do not related with CPI

C. Cash Flow Statements :

i. Payment for Lease Liability including Int. will be shown under financing
Activities.

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ii. Variable Lease Payments should be disclosed in operating Activities

iii. Payment for Non Lease Components Should also be disclosed under operating
Activities.

D. Notes to A/cs :
i. Maturity Analysis of Lease Liability
ii. ROU Asset should be disclosed in Notes with OB, Addition, Dep & CB.

Part B : Disclosures for Exempted Lease

A. B/S B. P&L C. CFS D. Notes

Prepaid/ outstanding a) Short Term Payment of Rent Details of Exempted
Rentals due to Diff. Lease Rent Under Operating Lease Rentals with
in Actual Payment Expensed Activities Maturity Analysis
and SLM Rent b) Low value
Lease rent
Expensed

Unit II : Disclosures for Lessor

Part A . Disclosures for Finance Lease

A. Balance sheet :-
Net Investment should be reported Separately from other Investments
In Lease
B. P&L :
i. Finance Income should be included in other Income
ii. Income from variable Lease payments should also be considered under other
Incomes.

Notes to A/c’s : Maturity Analysis of Net Investments

CFS :
i. Collection From Lessee in the form of Lease payments will be Disclosed
under “Investing Activities”
ii. Variable Lease rentals should be disclosed under Operating Activities

Part B. Operating Lease

B/S : Assets Given on OL should be disclosed separately from other Assets

PL : Rental Income on SLM Basis
CFS : Rental under operating Activities
Notes : i) Description of Assets which are Given on OL
ii) Maturity Analysis of OL rentals : Actual & SLM

Concept 13 : Lease Classification of “ Land & Building” for Lessors

If Land & Building has been Given on Lease by a Lessor then the following Points

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Should be considered :-

1) The Lessor should deal with Land & Building separately and these 2 Elements
Shall be tested individually from the Point of View of Operating Lease & finance
Lease
2) Lease Payments should also be divided between Land & Building in the ratio of
Their fair value

Exemptions

1) If Cost of Land is immaterial then we can consider it as a Single unit and

Classification of Lease shall be made according to Building.
2) If it is not Possible to Separate each other then we will deal Land according to
Classification of Building.

Concept 14 : Initial Direct Cost if paid by Lessor

IOC

Finance Lease Operating Lease

It will be adjusted while It will be written off on SLM

Computing IRR Basis over the Lease Period
LP + UDRV = FV + IDC

*Part 12*

Impact on Accounting for Lease contracts due to Rent concessions Given by

Lesser to Lessee During Covid-19 Pandemic
(Amendments made by MCA dated 24.7.2020)

Explanation

Unit I : Books of Lessee Unit II : Books of Lessor

Unit I : In the Books of Lessee

As per the Amendments made by MCA dated 24.7.20 in Ind AS 116, Lessee can take
Exemption from Accounting of Modification in Lease contracts due to change in Lease
Consideration on Rent concessions/ waivers or Deferrals during the period of covid-19
Pandemic made by Lessor only if All the Specified conditions as below are satisfied :-

Condition I : The concessions/ Waivers/ Deferrals should be due to a consequence of

Covid-19 Pandemic

Note : It means that Benefits in Payment of Rentals due to other reason cannot be
Considered under this Practical Expedient. In other cases, Lessee will consider it as

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Modification in Lease contract.

+
Condition II : The Revised consideration under New Terms should be equal to/ Less than
Original consideration which was as per Original Terms.
Note : If Revised consideration Exceeds Original consideration then It will be treated as
Modification
+
Condition III : The concession/ Deferrals/ waivers in Rent should be for the Period
Before 30.6.2021
Note : If any Benefit is Given for Rentals Payable beyond 30.6.21 then It will be
Considered as modification.
+
Condition IV : The other Terms & condition shall remain same as these were in Original
Contract.
Note : There should not be any *Substantive change in Original Terms
*It’s a matter of Judgement

Accounting Impact
As per Practical Expedient, Lessee will credit income statement at the time of
Reduction in Payment :-

Lease Liab. a/c Dr xxxx (Normal)

To Bank xxxx (Reduced)
To SOPL xxxx (Benefit)
“Reduction in Rental”
OR
Lease Liab. a/c Dr xxxx
To SOPL xxxx
“If whole Rent is waived off”
(Being Payment of Lease Liab. Recorded)

*In Future, if Any Rental is payable in Excess than Normal Payment due to deferment of
Rent then Excess Payment will be debited in P&L A/c.
Lease Liab. A/c Dr xxxx (Normal)
P&L a/c Dr xxxx (Excess)
To Bank xxxx (Increased)
(Being Payment of Rentals Recorded)

Solution of Q.4

In the Given case, Lessee Q can apply Practical Expedient Given by MCA while making
Accounting Entries for Payment of Lease Liability because It has satisfied all required
Conditions. It can record deferment of Rental through P&L A/c instead of recording it as
Modifications
In the Given case, the following observations have been made :-

1. The Rent has been Deferred due to covid-19 Pandemic

2. The concession has been made for Rentals which are payable before 30.6.2021

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3. There is no increase in original Lease consideration because Deferment is asked by

Lessee.
4. There is no change in other Terms & conditions.

Solution of Q.5
Same Answer can be Referred as Given in Q.4

Solution of Q.6

In the Given case, Lessee T should not apply Practical Expedient because
Concession in rental is for Period which is beyond 30.6.2021. The other conditions are
Satisfied, but Practical Expedient can be applied only if All conditions are satisfied. So,
Lessee Y should Treat this concession as modification in contract.

Solution of Q.7

In the given case, Lessee can apply Practical Expedient because All conditions are
Satisfied. There is an Extension of 3 months in original Lease Period which cannot be
Considered as Substantive change in original Terms.

Solution of Q.8

In the Given case, Lessee 2 will recognise this concession in P&L statement as a
Income. The following Entity may be passed :-

Journal : Lease Liab. a/c Dr 100,000

To P&L (Income) 100,000
(Being Rental waived off by Lessor & Practical Expedient has been Applied)

Unit II : In the books of Lessor

As per the Provisions of Amendments made by MCA dated 24.7.2020 there is no

Practical Expedient for Lessor under Rent concessions/ Waivers/ Deferrals. It means
that Lessor has to follow modification Rules in the Given case.

Lessor

Operating Lease Finance Lease

Allocate Revised consideration over Revise the Lease Receivables due to

Remaining Lease Period modifications as we learn in normal
Modifications

Solution of Q.1

In the Given case, there will be no change in Rental Income because overall Lease
Rental are same during the period due to which SLM Rentals shall also remain same.

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Solution of Q.2

As per the rules, the Lessor will compute Revised Income on SLM Basis over the remaining
Lease Period as follows :-

Rentals Per Annum (Normal) 180,000 (15000 P.m. x 12m)

Remaining Lease Period 5Y
Total Lease Rentals over the Lease Period 900,000
Concessions in Rental (15000 x 3) (45,000)
Revised Rentals 855,000

The Remaining Lease incentive of ₹ 300,000 will also be allocated over remaining 5 years
On SLM
Lease Incentive = 300,000 = 10000 = 5000 P.m.
5Y 12m
Net income = 14250 – 5000 = 9250

Solution of Q.3

1. In June 20, Termination of contract will be considered as major modification. Lessor

Will derecognise Lease Receivables & will Recognise Asset assuming Termination on same.
2. For the Period from June to Dec, It will be Accounted for as an Operating Lease.

*Part 13*

Solution of Q.10, Q.13, Q.14, Q.28, Q.32 , Q.38, Q.39 Discussed in Class

Thank You
Best of Luck…..!!!!!!
CA. Parveen Jindal

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