Webinar Series on Ind AS - icmai-wirc.in€¦ · Webinar Series on Ind AS By CMA Milind Date M Com, FCMA, CMA (USA), Dip IFRS (ACCA UK) 28-06-2020 CMA Milind Date 1. Ind AS 116 (supersedes

Webinar Series on Ind AS

By CMA Milind Date

M Com, FCMA, CMA (USA), Dip IFRS (ACCA UK)

28-06-2020 CMA Milind Date 1

Ind AS 116 (supersedes Ind AS 17)

effective from 1st April 2019 in

India – a pathbreaking move!

Similar to changes in IFRS & US

GAAP

Would bring trillions of dollars on

to the BS world over!


Objective & Scope


• to set out principles of recognition, measurement, presentation & disclosure of leases

• To ensure that lessees & lessors provide relevant information to faithfully represent lease transactions

• To enable users of FS to assess effects that leases have on financial position, financial performance & cash flows of the entity

Objective

• Leases to explore mineral resources

• Leases for biological assets held by the lessee (Ind AS 41)

• Service concession agreements (Ind AS 115, appendix)

• Licenses of IP grated by lessor within the scope of Ind AS 115

• Rights held by lessee under licensing agreements within the scope of Ind AS 38

Scope (applies to all leases including sub-lease) except

• This means that for intangible assets this standard is not mandatory!

A lessee may apply this standard to leases of intangible assets other than those mentioned in scope above

Recognition exemptions for Lessee

• Short term leases

• Leases for which the underlying asset is of low value

A lessee may not apply the provisions of this standard to

• The leases payments on such leases would be recognised as expense in the P/L on

• Straight-line basis over the lease term or

• Another systematic basis that reflects the pattern of lessee’s benefits

If the lessee opts for this,

• Any change in the lease term or lease modification would be considered as a new lease

If the lessee opts for this,


Lease contract – conveys right to control the use of identified asset for a period

of time for consideration


Source PWC

Example

• A contract between Customer and a freight carrier (Supplier) provides Customer with the use of 10 rail cars of a particular type for five years. The contract specifies the rail cars. Customer determines when, where and which goods are to be transported using the cars.

• When the cars are not in use, they are kept at Customer’s premises. Customer can use the cars for another purpose if it so chooses. However, the contract specifies that Customer cannot transport particular types of cargo.

• If a particular car needs to be serviced or repaired, Supplier is required to substitute a car of the same type. Otherwise, Supplier cannot retrieve the cars during the five-year period

The contract contains “lease”

– Assets are identified – particular type

– Customer has right to use the cars for contract period

– Supplier does not have right to substitute the cars unless they are being serviced or repaired

– Customer has right to control the use of the asset

– Type of cargo is “scope of contract” & doesn’t affect its status as a lease


Example

• A customer rents a solar farm

from the supplier. The supplier

receives tax credits relating to

the ownership of the solar

farm, whereas the customer

receives renewable energy

credits from the use of the

farm.

• Is this a lease contract?

The contract contains “lease”

– In this scenario, only the

renewable energy credits are

taken into account in the

analysis, because the tax

credits relate not to the use of

the solar farm but, instead, to

ownership of the asset


Lessee accounting – Initial recognition & measurement at inception

Right-of-Use Asset (Dr)

• Measured “at cost” that includes➢ Amount of initial measurement of lease

liability @ PV

➢ Any lease payment made before the commencement date less any lease incentive received

➢ Any initial direct cost incurred by lessee

➢ Any costs which the lessee will incur for dismantling & removing the underlying asset or restoring the site at the end of the lease term @ PV

Lease Liability (Cr)

• Measured at “PV of future lease payments” including expected payments at the end of lease term

• Discount rate for PV calculation is– Interest rate implicit in the lease

– If not available, lessee’s incremental borrowing rate

• Future lease payments include– Fixed payments

– Variable payments that depend on index e.g. consumer price index

– Residual value guarantees payable

– Ex. Price of purchase option i.e. expected to be exercised

– Penalties payable on lease termination


Lessee accounting – subsequent measurement at inception

Right-of-Use Asset

• Using cost model (Ind AS 16)

• Depreciation charge

– If there’s ownership transfer at the end

of lease term or bargain purchase

option (expected to exercise)

• Straight line over useful life of asset

– Otherwise

• Earlier of lease term or useful life

• Impairment (if any, Ind AS 36)

• CA = Cost – Acc. Dep. – Imp. Loss

Lease Liability

• Increase by finance cost (@ rate

used to determine PV initially)

• Reduce by lease payments

• CA = Op. bal. + interest - payment


Example

• A lessee enters into a 5 year lease of a building with useful life of 10 years. End of each year lease payments are Rs 50,000 pa

• The lessee incus initial direct costs of Rs 20,000 and receives incentives of Rs 5,000

• There is a purchase option at the end of the lease term which the lessee is reasonably expected to exercise

• Lessee’s incremental borrowing cost is 5%

Initial measurement

ROU asset

= PV of lease payments + direct costs –incentives

= 50,000*(annuity factor @ 5%, 10 years) + 20,000 – 5,000 = Rs 401,100

lease liability= PV of lease payments = Rs 386,100

Initial entry

Dr ROU 401,100

Cr Lease liability 386,100

Cr cash (20 – 5) 15,000


Example

• A lessee enters into a 5 year lease of a building with useful life of 10 years. End of each year lease payments are Rs 50,000 pa

• The lessee incus initial direct costs of Rs 20,000 and receives incentives of Rs 5,000

• There is no transfer of ownership nor a purchase option at the end of the lease term

• Lessee’s incremental borrowing cost is 5%

CA @ end of 1st year

ROU asset

= cost - depreciation

= 401,100 – 40,110 = Rs 360,990

lease liability= op. bal. + interest – rental paid

= 386,100 + (386,100*5%) – 50,000

= Rs 355,405


Lease term

• periods covered by an option to extend the lease if the lessee is reasonably certain to exercise that option; and

• periods covered by an option to terminate the lease if the lessee is reasonably certain not to exercise that option

Non-cancellable period of a lease together with

An entity shall consider all relevant facts and circumstances that create an economic incentive for the lessee to exercise the option to extend the lease, or not to exercise the option to terminate the lease

Lease term will be revised if there’s a change in the non-cancellable period


Remeasuring lease liability after commencement date


Lease modifications


Lessor accounting

• A lease that transfers substantially all the risks & rewards incidental to ownership of an underlying asset

Finance lease

• A lease that does not transfer substantially all the risks & rewards incidental to ownership of an underlying asset

Operating lease

Gross investment in lease = lease payments receivable by lessor in finance lease + unguaranteed residual value

Net investment in lease = gross investment discounted at interest rate implicit in the lease


Lessor accounting - Lease as a finance lease

• It transfers ownership to the lessee at the end of lease term

• Lease term is for a major part of the economic life of the asset, even if ownership is not transferred

• At the inception of the lease, the PV of minimum rentals is substantially equal to FV of the leased asset

• Lessee has the ability to continue to lease for a secondary period at a rent that is substantially lower than the market rent

For a lessor, the lease will be considered as financial lease based on following key considerations


Lessor accounting - Finance lease

Substantially all risks & returns of ownership are transferred to lessee

• Possible losses from idle capacity or technological obsolescence

• Variations in returns due to economic conditions

Risks of ownership refer to

• Profitable operations over the lease period

• Gain from appreciation in the value of asset or in residual value

Rewards of ownership refer to


Lessor accounting

• Record the amount due from lessee in the SOFP at net investment in lease

• Record the finance income to give constant periodic rate of return

If the lease is a finance lease

• Record as NCA & depreciate it over useful life

• Record lease rentals as income on a straight line basis over the lease term

If the lease is an operating lease


Sale & lease-back transactions

• Actions by lessee (seller)

• De-recognise underlying asset and apply lessee accounting requirements.

• Measure right-of-use asset as the retained portion of the previous carrying value.

• Recognise gain/loss on the rights transferred to the lessor.

• Actions by Lessor (Buyer)

• Apply applicable Ind AS to the asset purchased and lessor accounting requirements to the lease contract.

Transfer to buyer-lessor qualifies as a

sale

• Action by lessee (Seller)

• Continue recognition of asset.

• Amounts received are recognised as a financial liability under Ind AS 109 Financial Instruments.

• Action by Lessor (Buyer)

• Asset purchased is not recognised.

• Amounts paid are recognised as a financial asset under IFRS 9 Financial Instruments

Transfer to buyer-lessor

does not qualify as a sale


Transition to Ind AS 116 on 1st Apr 2019

Entities are not required to reassess existing lease contracts, but apply the definition of lease to contracts done on or after 1st Apr 2019

Full mandatory retrospective application (required under Ind AS 8) may not be done (i.e. it’s optional for Ind AS 116)

Transitional provisions permit a ‘simplified approach’

If lessee selects simplified approach, there’s no need to restate comparative information

Cumulative effect of applying the standard is recognised as an adjustment to opening RE on 1st Apr 2019


Simplified approach for Lessee


Example of transitioning on 1st Apr 2019

Entity X took a building on operating lease on 1 April

2013, for tenure of 5 years with an option to renew it for

further 10 years. On initial recognition of lease, Entity X

was not reasonably certain that it would exercise this

option and so the lease term was initially taken as 5

years.

However, on 1 April 2018, Entity X exercised its option of

renewal for another 10 years.

At the inception of lease (1 April 2013), the lease rentals

were INR 100,000 per annum. The lease rentals are paid

in advance at start of each year including lease

commencement date (i.e. 1 April 2013). The lease rentals

are subject to a 25% escalation on expiry of every five

years.

Entity X has decided to apply modified retrospective

approach whereby lease liability will be measured as on 1

April 2019 and ROU will be measured on lease

commencement date. Entity X’s incremental rate of

borrowing as on 1 April 2019 is 11.5%.

As per clause (e) of paragraph C10 of Appendix C of Ind AS 116, a lessee can use hindsight to determine lease term if the contract contains option to extend or terminate the lease.

Based on option provided by the Standard, lease liability can be calculated in either of the two ways:

(a) The entity avails the practical expedient of using hindsight to determine lease tenure, or

(b) the entity does not avail the practical expedient of using hindsight to determine lease tenure


Entity avails practical expedient i.e. lease term of 15 years on 1-4-2013


Entity avails practical expedient i.e. lease term of 15 years on 1-4-2013


Entity does not avail practical expedient i.e. lease term of 10 years on 1-4-2013


Disclosures – Adani ports

• Upon adoption of Ind AS 116, the Company applied a single recognition and measurement approach for all leases, except for short-term leases and leases of low-value assets

• The standard provides specific transition requirements and practical expedients, which has been applied by the Company

Accounting policy for leased land & buildings

• The Company did not change the initial carrying amounts of recognised assets and liabilities at the date of initial application i.e., the ROU assets and lease liabilities equal the lease assets and liabilities recognised under Ind AS 17

• The requirements of Ind AS 116 was applied to these leases from April 01, 2019 and accordingly carrying amount of lease assets has been reclassified as RoU assets

For leases previously classified as Finance lease

• The Company recognised right-of-use assets and lease liabilities for those leases

• Lease liabilities were recognised based on the present value of the remaining lease payments, discounted using the incremental borrowing rate at the date of initial application

• ROU assets were recognised at amount equal to the lease liabilities, adjusted for any related prepaid and accrued lease payments previously recognised

For leases previously classified as operating lease





Ind AS 116 & CAS

• Currently references to “lease” are found in

– CAS 11 (Admin expenses)• In case of leased assets, if the lease is an operating lease, the entire

rentals shall be included in the administrative overheads. If the lease is a financial lease, the finance cost portion shall be segregated and treated as part of finance costs

– All other standards mention that finance charges on lease rentals are not part of cost

• Lease rentals in operating leases will now become

– Depreciation on ROU asset &

– Finance cost



Documents

Webinar Series on Ind AS - icmai-wirc.in€¦ · Webinar Series on Ind AS By CMA Milind Date M Com, FCMA, CMA (USA), Dip IFRS (ACCA UK) 28-06-2020 CMA Milind Date 1. Ind AS 116 (supersedes