Ind AS 116 ICAI SM QUESTIONS EDITED

A Book on Financial Reporting
Ind AS 116
LEASES
SM 1. Short-term lease
Scenario A:
A lessee enters into a lease with a nine-month non-cancellable term with an option to extend the lease for four
months. The lease does not have a purchase option. At the lease commencement date, the lessee is reasonably
certain to exercise the extension option because the monthly lease payments during the extension period are
significantly below market rates. Whether the lessee can take a short-term exemption in accordance with Ind AS
116?
Scenario B:
Assume the same facts as Scenario A except, at the lease commencement date, the lessee is not reasonably certain
to exercise the extension option because the monthly lease payments during the optional extension period are at
what the lessee expects to be market rates and there are no other factors that would make exercise of the renewal
option reasonably certain. Will your answer be different in this case?
Ans.
Scenario A:
As the lessee is reasonably certain to exercise the extension option (Refer section 3.2 lease term), the lease term is
greater than 12 months (i.e., 13 months). Therefore, the lessee will not account for the lease as a short-term lease.
Scenario B:
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In this case, the lease term is less than 12 months, i.e., nine months. Thus, the lessee may account for the said
lease under the short-term lease exemption, i.e., it recognises lease payments as an expense on either a straight-
line basis over the lease term or another systematic basis
SM 2.
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Asset implicitly specified in a contract
Customer XYZ enters into a ten-year contract with Supplier ABC for the use of rolling stock specifically designed for
Customer XYZ.
The rolling stock is designed to transport materials used in Customer XYZ’s production process and is not suitable
for use by other customers. The rolling stock is not explicitly specified in the contract but, Supplier ABC owns only
one rolling stock that is suitable for Customer XYZ’s use. If the rolling stock does not operate properly, the contract
requires Supplier ABC to repair or replace the rolling stock.
Whether there is an identified asset?
Ans.
Yes, the said rolling stock is an identified asset.
Though the rolling stock is not explicitly specified in the contract (e.g., by serial number), it is implicitly specified
because Supplier ABC must use it to fulfil the contract.
SM 3. Asset implicitly specified in a contract
Customer XYZ enters into a ten-year contract with Supplier ABC for the use of a car. The specification of the car is
specified in the contract (i.e., brand, type, colour, options, etc.). At inception of the contract, the car is not yet
built.
Ans.
Yes, the said car is an identified asset.
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Though the car cannot be identified at inception of the contract, it is implicitly specified at the time the same will
be made available to Customer XYZ.
SM 4. Substantive Substitution Rights
Scenario A:
An electronic data storage provider (supplier) provides services through a centralised data centre that involve the
use of a specified server (Server No. 10). The supplier maintains many identical servers in a single accessible
location and determines, at inception of the contract, that it is permitted to and can easily substitute another
server without the customer’s consent throughout the period of use.
Further, the supplier would benefit economically from substituting an alternative asset, because doing this would
allow the supplier to optimise the performance of its network at only a nominal cost. In addition, the supplier has
made clear that it has negotiated this right of substitution as an important right in the arrangement, and the
substitution right affected the pricing of the arrangement.
Whether the substitution rights are substantive and whether there is an identified asset?
Scenario B:
Assume the same facts as in Scenario A except that Server No. 10 is customised, and the supplier does not have the
practical ability to substitute the customised asset throughout the period of use. Additionally, it is unclear whether
the supplier would benefit economically from sourcing a similar alternative asset.
Whether the substitution rights are substantive and whether there is an identified asset?
Ans.
Scenario A:
The customer does not have the right to use an identified asset because, at the inception of the contract, the
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supplier has the practical ability to substitute the server and would benefit economically from such a substitution.
Thus, there is no identified asset.
However, if the customer could not readily determine whether the supplier had a substantive substitution right
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(for e.g., there is insufficient transparency into the supplier’s operations), the customer would presume the
substitution right is not substantive and conclude that there is an identified asset.
Scenario B:
The substitution right is not substantive, and Server No. 10 would be an identified asset because the supplier does
not have the practical ability to substitute the asset and there is no evidence of economic benefit to the supplier
for substituting the asset. In this case, neither of the conditions of a substitution right is met (whereas both the
conditions must be met for the supplier to have a substantive substitution right). Therefore, Server No 10 will be
considered as an identified asset.
SM 5. Identified Asset – Physically Distinct):
Customer XYZ enters into a 15-year contract with Supplier ABC for the right to use five fibres within a fibre optic
cable between Mumbai and Pune. The contract identifies five of the cable’s 25 fibres for use by Customer XYZ. The
five fibres are dedicated solely to Customer XYZ’s data for the duration of the contract term. Assume that Supplier
ABC does not have a substantive substitution right.
Ans.
Yes, the said five fibres are identified assets because they are physically distinct and explicitly specified in the
contract.
SM 6. Identified Asset – Not Physically Distinct
Scenario A:
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Customer XYZ enters into a ten-year contract with Supplier ABC for the right to transport oil from India to
Bangladesh through Supplier ABC’s pipeline. The contract provides that Customer XYZ will have the right to use of
95% of the pipeline’s capacity throughout the term of the arrangement.
Scenario B:
Assume the same facts as in Scenario A, except that Customer XYZ has the right to use 65% of the pipeline’s
capacity throughout the term of the arrangement.
Ans.
Scenario A:
Yes, the capacity portion of the pipeline is an identified asset.
While 95% of the pipeline’s capacity is not physically distinct from the remaining capacity of the pipeline, it
represents substantially all of the capacity of the entire pipeline and thereby provides Customer XYZ with the right
to obtain substantially all of the economic benefits from use of the pipeline.
Scenario B:
No, the capacity portion of the pipeline is NOT an identified asset.
Since 65% of the pipeline’s capacity is less than substantially all of the capacity of the pipeline, Customer XYZ does
not have the right to obtain substantially all of the economic benefits from use of the pipeline.
SM 7. Right to use for a portion of the term of contract
ABC Ltd enters into a contract with XYZ Ltd, which grants ABC Ltd exclusive rights to use a specific grain storage
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facility over a five-year period in the months of May and June. During these months, ABC Ltd has the right to
decide which crops are placed in storage and when to remove them. XYZ Ltd provides the loading and unloading
services for the warehouse activities. During the other ten months each year, XYZ Ltd has the right to determine
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how the warehouse will be used.
Which party has the right to control the use of the identified asset during the period of use?
Ans.
In the above case, ABC Ltd has the right to control the use of the identified asset during the period of use because
they have the power to determine how the warehouse will be used during the contractually defined usage periods.
The analysis should focus on the rights and economics of the use of the warehouse for the specified usage periods
(May and June). During the period of use, ABC Ltd has the rights to determine how much of a crop to place in
storage, and the timing of placing and removing it from storage. These rights are more significant to the economics
of the use of the asset than the loading and unloading services performed by XYZ Ltd during the same period. ABC
Ltd receives all of the economic benefit from use of the asset during those specified time periods. Therefore,
contract contains a lease for the specified period of term.
SM 8. Right to obtain substantially all of the economic benefits
Company MNO enters into a 15-year contract with Power Company PQR to purchase all of the electricity produced
by a new solar farm. PQR owns the solar farm and will receive tax credits relating to the construction and
ownership of the solar farm, and MNO will receive renewable energy credits that accrue from use of the solar
farm.).
Who has the right to substantial benefits from the solar farm?
Ans.
Company MNO has the right to obtain substantially all of the economic benefits from use of the solar farm over the
15-year period because it obtains:
• the electricity produced by the farm over the lease term — i.e. the primary product fromuse of the asset; and
• the renewable energy credits — i.e. the by-product from use of the asset.
Although PQR receives economic benefits from the solar farm in the form of tax credits, these economic benefits
relate to the ownership of the solar farm. The tax credits do not relate to use of the solar farm and therefore are
not considered in this assessment.
SM 9. Right to direct the use of an asset
Customer X enters into a contract with Supplier Y to use a vehicle for a five-year period. The vehicle is identified in
the contract. Supplier Y cannot substitute another vehicle unless the specified vehicle is not operational (for e.g., if
it breaks down). Under the contract:
• Customer X operates the vehicle (i.e., drives the vehicle) or directs others to operate thevehicle (for e.g., hires
a driver).
• Customer X decides how to use the vehicle (within contractual limitations). For example, throughout the
period of use, Customer X decides where the vehicle goes, as well as whenor whether it is used and what it is
used for. Customer X can also change these decisionsthroughout the period of use.
• Supplier Y prohibits certain uses of the vehicle (for e.g., moving it overseas) andmodifications to the vehicle to
protect its interest in the asset.
Whether Customer X has the right to direct the use of the vehicle throughout the period of lease?
Ans.
Yes, Customer X has the right to direct the use of the identified vehicle throughout the period of use because it has
the right to change how the vehicle is used, when or whether the vehicle is used, where the vehicle goes and what
the vehicle is used for.
Supplier Y’s limits on certain uses for the vehicle and modifications to it are considered protective rights that define
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the scope of Customer X’s use of the asset, but do not affect the assessment of whether Customer X directs the use
of the asset.
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Entity A contracts with Supplier H to manufacture parts in a facility. Entity A designed the facility and provided its
specifications. Supplier H owns the facility and the land. Entity A specifies how many parts it needs and when it
needs the parts to be available. Supplier H operates the machinery and makes all operating decisions including how
and when the parts are to be produced, as long as it meets the contractual requirements to deliver the specified
number on the specified date. Assuming supplier H cannot substitute the facility and hence is an identified asset.
Which party has the right to control the use of the identified asset (i.e., equipment) during the period of use?
Ans.
Entity A does not direct the use of the asset that most significantly drives the economic benefits because Supplier
H determines how and when the equipment is operated once the contract is signed. Therefore, Supplier H has the
right to control the use of the identified asset during the period of use. Although Entity A stipulates the product to
be provided and has input into the initial decisions regarding the use of the asset through its involvement in the
design of the asset, it does not have decision making rights over how and for what purpose the asset will be used
over the asset during the period of use. This arrangement is a supply agreement, not a lease.
Entity L enters into a five—year contract with Company A, a ship owner, for the use of an identified ship. Entity L
decides whether and what cargo will be transported, and when and to which ports the ship will sail throughout the
period of use, subject to restrictions specified in the contract. These restrictions prevent Entity L from sailing the
ship into waters at a high risk of piracy or carrying explosive materials as cargo. Company A operates and maintains
the ship, and is responsible for safe passage.
Who has the right to direct the use of the ship during the period of use?
Ans.
Entity L has the right to direct the use of the ship. The contractual restrictions are protective rights. In the scope of
its right of use, Entity L determines how and for what purpose the ship is used throughout the five — year period
because it decides whether, where and when the ship sails, as well as the cargo that it will transport. Entity L has
the right to change these decisions throughout the period of use. Therefore, the contract contains a lease.
SM 12. Identifying and separating lease components
Scenario A:
A lessee enters a lease of an excavator and the related accessories (for e.g., excavator attachments) that are used
for mining purposes. The lessee is a local mining company that intends to use the excavator at a copper mine. How
many lease and non-lease components are there?
Scenario B:
Assume the same facts as in Scenario A, except that the contract also conveys the right to use an additional loading
truck. This loading truck could be deployed by the lessee for other uses (for e.g., to transport iron ores at another
mine).
Ans.
Scenario A:
The lessee would be unable to benefit from the use of the excavator without also using the accessories. Therefore,
the excavator is dependent upon the accessories. Thus, from the perspective of the lessee, the contract contains
one lease component.
Scenario B:
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The lessee can benefit from the loading truck on its own or together with other readily available resources because
the loading truck could be deployed for other uses independent of the excavator. The lessee can also benefit from
the use of the excavator on its own or together with other readily available resources.
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Thus, from the perspective of the lessee, the contract contains two lease components, viz., a lease of the excavator
(together with the accessories) and a lease of the loading truck.
SM 13. Identifying different components in the contract
Entity L rents an office building from Landlord M for a term of 10 years. The rental contract stipulates that the
office is fully furnished and has a newly installed and tailored HVAC system. It also requires Landlord M to perform
all common area maintenance (CAM) during the term of the arrangement. Entity L makes single monthly rental
payment and does not pay for the maintenance separately. The office building has a useful life of 40 years and the
HVAC system and office furniture each has a life of 15 years.
What are the units of account in the lease?
Ans.
There are three components in the arrangement – the building assets (office building and HVAC), the office
furniture, and the maintenance agreement.
The office building and HVAC system are one lease component because they cannot function independently of
each other. The HVAC system was designed and tailored specifically to be integrated into the office building and
cannot be removed and used in another building without incurring substantial costs. These building assets are a
lease component because they are identified assets for which Entity L directs the use.
The office furniture functions independently and can be used on its own. It is also a lease component because it is
a group of distinct assets for which Entity L directs the use.
The maintenance agreement is a non-lease component because it is a contract for service and not for the use of a
specified asset.
SM 14. Activities which are not components of a lease contract
Scenario A:
A lessee enters into a five-year lease of equipment, with fixed annual payments of ` 10,000. The contract contains
fixed annual payments as follows: ` 8,000 for rent, ` 1,500 for maintenance and ` 500 of administrative tasks. How
the consideration would be allocated?
Scenario B:
Assume the fact pattern as in scenario A except that, in addition, the contract requires the lessee to pay for the
restoration of the equipment to its original condition. How the consideration would be allocated?
Ans.
Scenario A:
The contract contains two components, viz., a lease component (lease of equipment) and a non-lease component
(maintenance). The amount paid for administrative tasks does not transfer a good or service to the lessee.
Assuming that the lessee does not elect to use the practical expedient as per para 15 of Ind AS 116, both the lessee
and the lessor account for the lease of equipment and maintenance components separately and the administration
charge is included in the total consideration to be allocated between those components. Therefore, the total
consideration in the contract of ` 50,000 will be allocated to the lease component (equipment) and the non-lease
component (maintenance).
Scenario B:
The contract still contains two components, viz., a lease component (lease of equipment) and a non-lease
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component (maintenance). Similar to the amount paid for administrative tasks, the restoration does not transfer a
good or service to the lessee as it is only performed at the end of the lease term.
Therefore, the total consideration in the contract of ` 50,000 will be allocated to the lease component (equipment)
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and the non-lease component (maintenance).
SM 15. Allocating contract consideration to lease and non-lease components – Lessees
A lessee enters into a lease of an equipment. The contract stipulates the lessor will perform maintenance of the
leased equipment and receive consideration for that maintenance service. The contract includes the following
fixed prices for the lease and non-lease component:
Lease ` 80,000
Maintenance ` 10,000
` 90,000
Total
Assume the stand-alone prices cannot be readily observed, so the lessee makes estimates, maximising the use of
observable information, of the lease and non-lease components, as follows:
Lease ` 85,000
Maintenance ` 15,000
Total ` 1,00,000
In the given scenario, assuming lessee has not opted the practical expedient, how will the lessee allocate the
consideration to lease and non-lease component?
Ans.
The stand-alone price for the lease component represents 85% (i.e., ` 85,000 / ` 1,00,000) of total estimated
stand-alone prices. The lessee allocates the consideration in the contract (i.e., ` 90,000), as follows:
Lease * ` 76,500
Maintenance ** ` 13,500
Total ` 90,000
* ` 90,000 x 85%
** ` 90,000 x 15%
SM 16. Determining the lease term
Scenario A:
Entity ABC enters into a lease for equipment that includes a non-cancellable term of six years and a two-year fixed-
priced renewal option with future lease payments that are intended to approximate market rates at lease
inception. There are no termination penalties or other factors indicating that Entity ABC is reasonably certain to
exercise the renewal option. What is the lease term?
Scenario B:
Entity XYZ enters into a lease for a building that includes a non-cancellable term of eight years and a two-year,
market-priced renewal option. Before it takes possession of the building, Entity XYZ pays for leasehold
improvements. The leasehold improvements are expected to have significant value at the end of eight years, and
that value can only be realised through continued occupancy of the leased property. What is the lease term?
Scenario C:
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Entity PQR enters into a lease for an identified retail space in a shopping centre. The retail space will be available to
Entity PQR for only the months of October, November and December during a non-cancellable term of seven years.
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The lessor agrees to provide the same retail space for each of the seven years. What is the lease term?
Ans.
Scenario A:
At the lease commencement date, the lease term is six years (being the non-cancellable period). The renewal
period of two years is not taken into consideration since it is mentioned that Entity ABC is not reasonably certain to
exercise the option.
Scenario B:
At the lease commencement, Entity XYZ determines that it is reasonably certain to exercise the renewal option
because it would suffer a significant economic penalty if it abandoned the leasehold improvements at the end of
the initial non-cancellable period of eight years. Thus, at the lease commencement, Entity XYZ concludes that the
lease term is ten years (being eight years of non-cancellable period plus the renewal period of two years where the
lessee is reasonably certain to exercise the option).
Scenario C:
At the lease commencement date, the lease term is 21 months (three months per year over the seven annual
periods as specified in the contract), i.e., the period over which Entity PQR controls the right to use the underlying
asset.
SM 17. Re-assessment of exercise of lease extension option
Retailer M enters into a five-year lease for a building floor, followed by two successive five-year renewal options.
On the commencement date, Retailer M is not reasonably certain to exercise the extension option. At the end of
third year, Retailer M extended to include another floor from year 4 due to a business acquisition. For this purpose,
the lessee concludes a separate seven-year lease for an additional floor in the building already leased. Is Retailer M
required to reassess the lease term in this case?
Ans.
Ind AS 116 requires a lessee to reassess the lease term if there is change in business decision of the company which
is directly relevant to exercising or not exercising an option to renew / extend the lease. In the given case, the
Retailer M at the end of third year has extended to include another floor in the same building on account of
acquiring another company. As Retailer M has entered into fresh lease of another floor for a seven-year term, it is
reasonably certain to exercise the renewal option of original lease for a further five-year term. Hence Retailer M
will have to reassess the lease term at the end of third year.
SM 18. Re-assessment of non-cancellable period of lease
Company N has taken 10 vehicles on lease for an initial period of 5 years with an extension option at the option of
the lessee for a further period of 5 years at the same rental amount. The remaining useful life of the vehicles as on
the commencement date of the lease is 15 years. Company N has determined at the commencement date that it is
reasonably certain to exercise the extension option and hence it has taken a period of 10 years for the lease. At the
end of 4th year, there is an announcement by the government that all the cars of this particular model have to be
discontinued from the road within 1 year due to the change in the pollution norms in the country. Will the lease
term be reassessed in this case?
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In the given case, as per Ind AS 116, the announcement by the government to discontinue the use of the
underlying asset will prohibit the lessee from exercising the extension option that was already included in the non-
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cancellable period by Company N and hence, Company N will reassess the non-cancellable period to exclude the
extension option of 5 years.
SM 19. Determining the fixed payments
Entity M and Lessor A enter into a 10-year lease of an office building for fixed annual lease payments of ` 200,000.
Per the terms of the lease agreement, annual fixed lease payments comprise ` 170,000 for rent and ` 30,000 for
real estate taxes.
What are the fixed lease payments for purposes of classifying the lease?
Ans.
The fixed lease payments are ` 2,00,000. Although real estate taxes are explicitly stated in the lease contract, they
do not represent a separate non-lease component as they do not provide a separate good or service. The right to
use the office building is the only component. The annual lease payments of ` 2,00,000 represent payments
related to that single lease component.
SM 20. In substance fixed lease payments
Entity Q enters into a seven-year lease for a piece of machinery. The contract sets out the lease payments as
follows.
– If Q uses the machinery within a given month, then an amount of 2,000 accrues for that month.
– If Q does not use the machinery within a given month, then an amount of 1,000 accrues for that month.
What is considered as lease payment in this case?
Ans.
Q considers the contract and notes that although the lease payments contain variability based on usage, and there
is a realistic possibility that Q may not use the machinery in some months, a monthly payment of 1,000 is
unavoidable. Accordingly, this is an in-substance fixed payment, and is included in the measurement of the lease
liability.
SM 21. In-substance fixed lease payment
Entity P enters into a five-year lease for office space with Entity Q. The initial base rent is ` 1 lakh per month. Rents
increase by the greater of 1% of Entity P’s generated sales or 2% of the previous rental rate on each anniversary of
the lease commencement date. What are the lease payments for purposes of measuring lease liability?
Ans.
In the given case, the lease payments for purposes of classifying the lease are the fixed monthly payments of ` 1
lakh plus the minimum annual increase of 2% of the previous rental rate. Entity P is required to pay no less than a
2% increase regardless of the level of sales activity; therefore, this minimum level of increase is in substance fixed
lease payment.
SM 22. In substance fixed lease payments
Company N leases a production line. The lease payments depends on the number of operating hours of the
production line – i.e., N has to pay ` 1,000 per hour of use. The annual minimum payment is ` 10,00,000. The
expected usage per year is 1,500 hours
Ans.
The lease contains in substance fixed payments of ` 10,00,000 per year, which are included in the initial
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measurement of the lease liability. The additional ` 5,00,000 that Company N expects to pay per year are variable
payments that do not depend on an index or a rate but usage.
SM 23. Variable lease payments that depend on an index or rate
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An entity enters into a 10-year lease of property. The lease payment for the first year is ` 1,000. The lease
payments are linked to the consumer price index (CPI), i.e., not a floating interest rate. The CPI at the beginning of
the first year is 100. Lease payments are updated at the end of every second year. At the end of year one, the CPI is
105. At the end of year two, the CPI is 108. What should be included in lease payments?
Ans.
At the lease commencement date, the lease payments are ` 1,000 per year for 10 years. The entity does not take
into consideration the potential future changes in the index. At the end of year one, the payments have not
changed and hence, the liability is not updated.
At the end of year two, when the lease payments change, the entity updates the remaining eight lease payments
to ` 1,080 per year (i.e., ` 1,000 / 100 x 108).
SM 24. Variable lease payments that do not depend on an index or rate
Entity XYZ is a medical equipment manufacturer and a supplier of the related consumables. Customer ABC
operates a medical centre. Under the agreement entered into by both parties, Entity XYZ grants Customer ABC the
right to use a medical laboratory machine at no cost and Customer ABC purchases consumables for use in the
equipment from Entity XYZ at ` 100 each.
The consumables can only be used for that equipment and Customer ABC cannot use other consumables as
substitutes. There is no minimum purchase amount required in the contract.
Based on its historical experience, Customer ABC estimates that it is highly likely to purchase at least 8,000 units of
consumables annually. Customer ABC has appropriately assessed that the arrangement contains a lease of medical
equipment. There are no residual value guarantees or other forms of consideration included in the contract.
Whether these payments affect the calculation of lease liability and ROU Asset? How does Entity XYZ and Customer
ABC would allocate these lease payments?
Ans.
There are two components in the arrangement, viz., a lease of equipment and the purchase of consumables.
Even though Customer ABC may believe that it is highly unlikely to purchase lesser than 8,000 units of consumables
every year, in this example, there are no lease payments for purposes of initial measurement (for Entity XYZ and
Customer ABC) and lease classification (for Entity XYZ).
Entity XYZ and Customer ABC would allocate the payments associated with the future payments to the lease and
consumables component of the contract.
SM 25. Variable lease payments
Entity A enters into a five-year lease of an office building. The lease payments are ` 5,00,000 per year and the
contract includes an additional water charge calculated as ` 0.50 per litre consumed. Payments are due at the end
of year. Entity A elects to apply the practical expedient to combine lease and non-lease components
Ans.
As stated above, payments are due at the end of the year. Entity A elects to apply the practical expedient not to
separate lease and non-lease components.
At the commencement date, Entity A measures the lease liability as the present value of the fixed lease payments
(i.e. five annual payments of 5,00,000). Although Entity A has elected to apply the practical expedient to combine
non-lease components (i.e. water charges) with the lease component, Entity A excludes the non-lease component
from its lease liability because they are variable payments that depend on usage. That is, the nature of the costs
does not become fixed just because Entity A has elected not to separate them from the fixed lease payments.
Entity A recognises the payments for water – as a variable lease payment – in profit or loss when they are incurred.
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In contrast, if B does not elect to apply the practical expedient to combine lease and non-lease components, then it
recognises the payments for water – as an operating expense – in profit or loss when they are incurred.
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SM 26. Residual value guarantee included in lease payments
An entity (a lessee) enters into a lease and guarantees that the lessor will realise ` 20,000 from selling the asset to
another party at the end of the lease. At lease commencement, based on the lessee’s estimate of the residual
value of the underlying asset, the lessee determines that it expects that it will owe ` 8,000 at the end of the lease.
Whether the lessee should include the said payment of ` 8,000 as a lease payment?
Ans.
The lessee should include the amount of ` 8,000 as a lease payment because it is expected that it will owe the
same to the lessor under the residual value guarantee.
SM 27. Initial measurement of lease liability
Entity L enters into a lease for 10 years, with a single lease payment payable at the beginning of each year. The
initial lease payment is ` 100,000. Lease payments will increase by the rate of LIBOR each year. At the date of
commencement of the lease, LIBOR is 2 per cent.
Assume that the interest rate implicit in the lease is 5 per cent. How lease liability is initially measured?
Ans.
In the given case, the lease payments depend on a rate (i.e., LIBOR) and hence is included in measuring lease
liability, As per Ind AS 116, the lease payments should initially be measured using the rate (i.e. LlBOR) as at the
commencement date. LIBOR at that date is 2 per cent; therefore, in measuring the lease liability, it is assumed that
each year the payments will increase by 2 per cent, as follows
Year Lease Payment Discount factor @ 5% PV of lease payments
1 1,00,000 1 100,000
2 1,02,000 0.952 97,102
1,04,040 0.907 94,364

3
4 1,06,121 0.864 91,689
5 1,08,243 0.823 89,084
1,10,408 0.784 86,560

6
7 1,12,616 0.746 84,012
8 1,14,869 0.711 81,672
1,17,166 0.677 79,321

9
10 1,19,509 0.645 77,083
8,80,887
Therefore, the lease liability is initially measured at ` 8,80,887
SM 28. Measuring right-of-use asset
Entity Y and Entity Z execute a 12-year lease of a railcar with the following terms on January 1, 2016:
• The lease commencement date is February 1, 2016.
• Entity Y must pay Entity Z the first monthly rental payment of ` 10,000 upon execution of the lease.
• Entity Z will pay Entity Y ` 50,000 cash incentive to enter into the lease payable upon lease execution.
Entity Y incurred ` 1,000 of initial direct costs, which are payable on February 1, 2016. Entity Y calculated the initial
lease liability as the present value of the lease payments discounted using its incremental borrowing rate because
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the rate implicit in the lease could not be readily determined; the initial lease liability is ` 850,000.
How would Lessee Company measure and record this lease?
Ans.
CA Sarthak Jain
Entity Y would calculate the right-of-use asset as follows: `
Initial measurement of lease liability 8,50,000
Lease payments made to Entity Z at or before the commencement date 10,000
Lease incentives received from Entity Z (50,000)
1,000
Initial direct cost
Initial measurement of right-of-use asset 8,11,000
SM 29. Dismantling costs to be included in initial measurement of ROU Asset
Company H leases an aircraft for a period of 5 years. The aircraft must undergo a planned check after every
100,000 flight hours. At the end of the lease, company H must have a check performed (or refund the costs to the
lessor), irrespective of the actual number of flight hours. What are the lease payments for purposes of calculating
ROU asset?
Ans.
In the given case, the legal requirement to perform a check after every 1,00,000 flight hours does not directly lead
to an obligation as it depends on future circumstances. However, as the check must be carried out at the end of
the lease irrespective of the actual number of flight hours gives rise to an obligation.
As a result, company H has to recognize a provision for the costs of the final check (“present value of the expected
cost”) at the beginning of the lease term. At the same time, these costs must be included in the cost of the right-of-
use (ROU) asset pursuant to para 24 (d) of Ind AS 116.
SM 30. Lessee Accounting
Entity ABC (lessee) enters into a three-year lease of equipment. Entity ABC agrees to make the following annual
payments at the end of each year:
` 20,000 in year one
` 30,000 in year two
` 50,000 in year three.
For simplicity purposes, there are no other elements to the lease payments (like purchase options, lease incentives
from the lessor or initial direct costs). Assumed a discount rate of 12% (which is Entity ABC’s incremental
borrowing rate because the interest rate implicit in the lease cannot be readily determined). Entity ABC
depreciates the ROU Asset on a straight-line basis over the lease term.
How would Entity ABC would account for the said lease under Ind AS 116?
Ans.
At the commencement date, Entity ABC would initially recognise ROU Asset and the corresponding Lease Liability
of ` 77,364 which is calculated as follows:
Year Payments Discounting Factor Discounted Cash flows /
(Cash flows) @12% Present Value
20,000 0.8929 17,858

1
2 30,000 0.7972 23,916
3 50,000 0.7118 35,590
1,00,000 77,364
Then, the next step would be to prepare a schedule for Lease Liability and ROU Asset as follows:
Lease Liability
Year Opening balance Interest Expense Payments Closing balance
1 77,364
66,648
www.fast.edu.in 9,284
7,998
(20,000)
(30,000)
66,648
44,646
3 44,646 5,354* (50,000) -
CA Sarthak Jain
* Difference of ` 4 is due to approximation.
ROU Asset (assuming no lease incentives, no initial direct costs, etc.):
Year Opening balance Depreciation Closing balance
1 77,364 (25,788) 51,576
2 51,576 (25,788) 25,788
25,788 (25,788) -
3
At lease commencement, Entity ABC would recognise the Lease Liability and the corresponding ROU Asset as
follows:
ROU Asset Dr. 77,364
To Lease Liability 77,364
To initially recognise the Lease Liability and the corresponding ROU Asset
The following journal entries would be recorded in the first year:
Interest Expense Dr. 9,284
9,284
To Lease Liability
To record interest expense and accrete the lease liability using the effective interest method (` 77,364 x 12%)
Depreciation Expense Dr. 25,788
To ROU Asset 25,788
To record interest expense and accrete the lease liability using the straight line method (` 77,364 / 3 years)
Lease Liability Dr. 20,000
To Cash / Bank 20,000
To record lease payment
Following is the summary of the said lease contract’s accounting (assuming no changes due to reassessment):
Particulars Initially Year 1 Year 2 Year 3
Cash lease payments 20,000 30,000 50,000
Lease Expense Recognised:
9,284 7,998 5,354

Interest Expense
Depreciation Expense 25,788 25,788 25,788
Total Periodic Expense 35,072 33,786 31,142
Balance Sheet:
ROU Asset 77,364 51,576 25,788 -
Lease Liability (77,364) (66,648) (44,646) -
SM 31. Subsequent measurement using cost model
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Company EFG enters into a property lease with Entity H. The initial term of the lease is 10 years with a 5- year
renewal option. The economic life of the property is 40 years and the fair value of the leased property is ` 50 Lacs.
Company EFG has an option to purchase the property at the end of the lease term for ` 30 lacs. The first annual
CA Sarthak Jain
payment is ` 5 lacs with an increase of 3% every year thereafter. The implicit rate of interest is 9.04%. Entity H gives
Company EFG an incentive of ` 2 lacs (payable at the beginning of year 2), which is to be used for normal tenant
improvement.
Company EFG is reasonably certain to exercise that purchase option. How would EFG measure the right-of-use asset
and lease liability over the lease term?
Ans.
As per Ind AS 116, Company EFG would first calculate the lease liability as the present value of the annual lease
payments, less the lease incentive paid in year 2, plus the exercise price of the purchase option using the rate implicit
in the lease of approximately 9.04%.
PV of lease payments, less lease incentive (W.N. 1) ` 37,39,648
` 12,60,000
PV of purchase option at end of lease term (W.N. 2)
Total lease liability ` 49,99,648 or ` 50,00,000 (approx.)
The right-of-use asset is equal to the lease liability because there is no adjustment required for initial direct costs
incurred by Company EFG, lease payments made at or before the lease commencement date, or lease incentives
received prior to the lease commencement date.
Entity EFG would record the following journal entry on the lease commencement date.
Right-of-use Asset Dr. ` 50,00,000
` 50,00,000
To Lease Liability
To record ROU asset and lease liability at the commencement date.
Since the purchase option is reasonably certain to be exercised, EFG would amortize the right-of-use asset over the
economic life of the underlying asset (40 years). Annual amortization expense would be ` 1,25,000 (` 50,00,000 / 40
years)
Interest expense on the lease liability would be calculated as shown in the following table. This table includes all
expected cash flows during the lease term, including the lease incentive paid by Entity H and Company EFG’s
purchase option.
Year Payment Principal paid at the Interest paid Interest expense Lease Liability
beginning of the (end of the year
year
a b= a-c c = (d of pvs. d = [(e of pvs. year- e = (e of pvs.
Year) a) x 9.04%] Year + d – a)
Commencement 50,00,000
5,00,000 5,00,000 - 4,06,800 49,06,800

Year 1
Year 2 3,15,000* (91,800) 4,06,800 4,15,099 50,06,899
Year 3 5,30,450 1,15,351 4,15,099 4,04,671 48,81,120
5,46,364 1,41,693 4,04,671 3,91,862 47,26,618

Year 4
Year 5 5,62,754 1,70,892 3,91,862 3,76,413 45,40,277
Year 6 5,79,637 2,03,224 3,76,413 3,58,042 43,18,682
5,97,026 2,38,984 3,58,042 3,36,438 40,58,094

Year 7
Year 8 www.fast.edu.in
6,14,937 2,78,499 3,36,438 3,11,261 37,54,418
Year 9 6,33,385 3,22,124 3,11,261 2,82,141 34,03,174
6,52,387 3,70,246 2,82,141 2,49,213* 30,00,000
Year 10
Year 10
CA Sarthak Jain
30,00,000 27,50,787 2,49,213* - -
Total 85,31,940 50,00,000 35,31,940 35,31,940
*(5,00,000 + increased by 3% - lease incentive paid amounting to 2,00,000)
Although the lease was for 10 years, the asset had an economic life of 40 years. When Company EFG exercises its
purchase option at the end of the 10-year lease, it would have fully extinguished its lease liability but continue
depreciating the asset over the remaining useful life.
Working Notes
1. Calculating PV of lease payments, less lease incentive:
Year Lease Payment Present value factor Present value of lease
(A) @ 9.04% (B) payments (A*B=C)
Year 1 5,00,000 1 5,00,000
Year 2 3,15,000 0.92 2,89,800
Year 3 5,30,450 0.84 4,45,578
Year 4 5,46,364 0.77 4,20,700
5,62,754 0.71 3,99,555

Year 5
Year 6 5,79,637 0.65 3,76,764
Year 7 5,97,026 0.59 3,52,245
6,14,937 0.55 3,38,215

Year 8
Year 9 6,33,385 0.50 3,16,693
Year 10 6,52,387 0.46 3,00,098
Total 37,39,648
2. Calculating PV of purchase option at end of lease term:
Year Payment on purchase option Present value factor @ Present value of purchase option
(A) 9.04% (B) (A*B=C)
30,00,000 0.42 12,60,000

Year 10
Total 12,60,000
The discount rate for year 10 is different in the above calculations because in the earlier one its beginning of year 10
and in the later one its end of the year 10.
SM 32. Remeasurement of a lease with variable lease payments
Entity W entered into a contract for lease of retail store with Entity J on January 01/01/2017. The initial term of the
lease is 5 years with a renewal option of further 3 years. The annual payments for initial term and renewal term is `
100,000 and ` 110,000 respectively. The annual lease payment will increase based on the annual increase in the CPI
at the end of the preceding year. For example, the payment due on 01/01/18 will be based on the CPI available at
31/12/17.
Entity W’s incremental borrowing rate at the lease inception date and as at 01/01/2020 is 5% and 6% respectively
and the CPI at lease commencement date and as at 01/01/2020 is 120 and 125 respectively.
At the lease commencement date, Entity W did not have a significant economic incentive to exercise the renewal
option. In the first quarter of 2020, Entity W installed unique lease improvements into the retail store with an
estimated five-year economic life. Entity W determined that it would only recover the cost of the improvements if it
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exercises the renewal option, creating a significant economic incentive to extend.
Is Entity W required to remeasure the lease in the first quarter of 2020?
Ans.
in the first quarter of 2020.

CA Sarthak Jain
Since Entity W is now reasonably certain that it will exercise its renewal option, it is required to remeasure the lease
The following table summarizes information pertinent to the lease remeasurement.
Remeasured lease term 5 years; 2 years remaining in the
initial term plus 3 years in
the renewal period
Entity W’s incremental borrowing rate On the
remeasurement date 6%
CPI available on the remeasurement date 125
Right-of-use asset immediately before the remeasurement ` 1,81,840 (Refer note 1)
Lease liability immediately before the remeasurement ` 1,85,947 (Refer note 1)
To remeasure the lease liability, Entity W would first calculate the present value of the future lease payments for the
new lease term (using the updated discount rate of 6%). The following table shows the present value of the future
lease payments based on an updated CPI of 125. Since the initial lease payments were based on a CPI of 120, the CPI
has increased by 4% approx. As a result, Entity W would increase the future lease payments by 4%. As shown in the
table, the revised lease liability is ` 490,589.
Year 4 5 6 7 8 Total
Lease payment 104,000 104,000 114,400 114,400 114,400 551,200
Discount 1 0.943 0.890 0.840 0.792
Present value 104,000 98,072 101,816 96,096 90,605 490,589
To calculate the adjustment to the lease liability, Entity W would compare the recalculated and original lease liability
balances on the remeasurement date.
Revised lease liability 490,589
Original lease liability (1,85,947)
3,04,642
Entity W would record the following journal entry to adjust the lease liability.
ROU Asset Dr. 3,04,642
To Lease liability 3,04,642
Being lease liability and ROU asset adjusted on account of remeasurement.
Working Notes:
1 Calculation of ROU asset before the date of remeasurement
Year Lease Payment Present value factor Present value of lease payments
beginning www.fast.edu.in
(A) @ 5% (B) (AxB=C)
1 1,00,000 1.000 1,00,000
2 1,00,000 0.952 95,200
3 CA Sarthak Jain
1,00,000 0.907 90,700
4 1,00,000 0.864 86,400
5 1,00,000 0.823 82,300
Lease liability as at commencement date 4,54,600
2 Calculation of Lease Liability and ROU asset at each year end
Year Lease Liability ROU asset
Initial Lease Interest Closing Initial Depreciation Closing
value payments expense balance Value balance
1 4,54,600 1,00,000 - 3,54,600 4,54,600 90,920 3,63,680
2 3,54,600 1,00,000 17,730 2,72,330 3,63,680 90,920 2,72,760
3 2,72,330 1,00,000 13,617 1,85,947 2,72,760 90,920 1,81,840
4 1,85,947 1,81,840
SM 33. Modification that is a separate lease
Lessee enters into a 10-year lease for 2,000 square metres of office space. At the beginning of Year 6, Lessee and
Lessor agree to amend the original lease for the remaining five years to include an additional 3,000 square metres of
office space in the same building. The additional space is made available for use by Lessee at the end of the second
quarter of Year 6. The increase in total consideration for the lease is commensurate with the current market rate for
the new 3,000 square metres of office space, adjusted for the discount that Lessee receives reflecting that Lessor
does not incur costs that it would otherwise have incurred if leasing the same space to a new tenant (for example,
marketing costs).
How should the said modification be accounted for?
Ans.
Lessee accounts for the modification as a separate lease, separate from the original 10-year lease because the
modification grants Lessee an additional right to use an underlying asset, and the increase in consideration for the
lease is commensurate with the stand-alone price of the additional right-of-use adjusted to reflect the circumstances
of the contract. In this example, the additional underlying asset is the new 3,000 square metres of office space.
Accordingly, at the commencement date of the new lease (at the end of the second quarter of Year 6), Lessee
recognises a ROU Asset and a lease liability relating to the lease of the additional 3,000 square metres of office space.
Lessee does not make any adjustments to the accounting for the original lease of 2,000 square metres of office space
as a result of this modification.
SM 34. Modification that increases the scope of the lease by extending the contractual lease term
Lessee enters into a 10-year lease for 5,000 square metres of office space. The annual lease payments are ` 1,00,000
payable at the end of each year. The interest rate implicit in the lease cannot be readily determined. Lessee’s
incremental borrowing rate at the commencement date is 6% p.a. At the beginning of Year 7, Lessee and Lessor
agree to amend the original lease by extending the contractual lease term by four years. The annual lease payments
are unchanged (i.e., ` 1,00,000 payable at the end of each year from Year 7 to Year 14). Lessee’s incremental
borrowing rate at the beginning of Year 7 is 7% p.a.
Ans.
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At the effective date of the modification (at the beginning of Year 7), Lessee remeasures the lease liability based on:
(a)
(b)
CA Sarthak Jain
An eight-year remaining lease term
Annual payments of ` 1,00,000 and
(c) Lessee’s incremental borrowing rate of 7% p.a.
The modified lease liability equals ` 5,97,100 (W.N.1). The lease liability immediately before the modification
(including the recognition of the interest expense until the end of Year 6) is ` 3,46,355 (W.N.3). Lessee recognises the
difference between the carrying amount of the modified lease liability and the carrying amount of the lease liability
immediately before the modification (i.e., ` 2,50,745) (W.N. 4) as an adjustment to the ROU Asset.
Working Notes:
1. Calculation of modified lease liability:
Year Lease Payment (A) Present value factor @ Present value of lease
7% (B) payments (A*B=C)
7 100,000 0.935 93,500
8 100,000 0.873 87,300
9 100,000 0.816 81,600
10 100,000 0.763 76,300
11 100,000 0.713 71,300
12 100,000 0.666 66,600
13 100,000 0.623 62,300
14 100,000 0.582 58,200
Modified lease liability 5,97,100
2. Calculation of Lease liability as at commencement date:
Year Lease Payment Present value factor @ 6% (B) Present value of lease
(A) payments (A x B = C)
1 100,000 0.943 94,300
2 100,000 0.890 89,000
3 100,000 0.840 84,000
4 100,000 0.792 79,200
5 100,000 0.747 74,700
6 100,000 0.705 70,500
7 100,000 0.665 66,500
8 100,000 0.627 62,700
9 100,000 0.592 59,200
10 100,000 0.558 55,800
Lease liability as at modification date 7,35,900
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3. Calculation of Lease liability immediately before modification date:
Year Opening lease liability Interest @ 6% Lease payments Closing liability
1
(A)
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7,35,900
(B) = [A x 6%]
44,154
(C)
100,000
(D) = [A+B-C]
6,80,054
2 6,80,054 40,803 100,000 6,20,857
3 6,20,857 37,251 100,000 5,58,108
4 5,58,108 33,486 100,000 4,91,594
5 4,91,594 29,496 100,000 4,21,090
6 4,21,090 25,265 100,000 3,46,355
4. Adjustment to ROU asset:
Modified Lease liability 5,97,100
Original Lease liability as at modification date (3,46,355)
Adjustment to ROU asset 2,50,745
The ROU asset will be increased by ` 2,50,745 on the date of modification.
SM 35. Modification that decreases the scope of the lease
Lessee enters into a 10-year lease for 5,000 square metres of office space. The annual lease payments are ` 50,000
payable at the end of each year. The interest rate implicit in the lease cannot be readily determined. Lessee’s
incremental borrowing rate at the commencement date is 6% p.a. At the beginning of Year 6, Lessee and Lessor
agree to amend the original lease to reduce the space to only 2,500 square metres of the original space starting
from the end of the first quarter of Year 6. The annual fixed lease payments (from Year 6 to Year 10) are ` 30,000.
Lessee’s incremental borrowing rate at the beginning of Year 6 is 5% p.a.
Ans.
In the given case, Lessee calculates the ROU asset and the lease liabilities before modification as follows:
Lease Liability ROU asset
Year Initial value Lease Interest Closing Initial Depreciation Closing
payments expense balance Value balance
@ 6%
a b c = a x 6% d = a-b + c e f g
1 3,67,950* 50,000 22,077 3,40,027 3,67,950 36,795 3,31,155
2 3,40,027 50,000 20,402 3,10,429 3,31,155 36,795 2,94,360
3 3,10,429 50,000 18,626 2,79,055 2,94,360 36,795 2,57,565
4 2,79,055 50,000 16,743 2,45,798 2,57,565 36,795 2,20,770
5 2,45,798 50,000 14,748 2,10,546 2,20,770 36,795 1,83,975
6 2,10,546 1,83,975
*(refer note 1) www.fast.edu.in
(a) a five-year remaining lease term,
CA Sarthak Jain
(b) annual payments of ` 30,000 and
Year Lease Payment(A) Present value factor Present value of lease
@ 5% (B) payments (A x B = C)
6 30,000 0.952 28,560
7 30,000 0.907 27,210
8 30,000 0.864 25,920
9 30,000 0.823 24,690
10 30,000 0.784 23,520
Total 1,29,900
Lessee determines the proportionate decrease in the carrying amount of the ROU Asset on the basis of the
remaining ROU Asset (i.e., 2,500 square metres corresponding to 50% of the original ROU Asset).
50% of the pre-modification ROU Asset (` 1,83,975) is ` 91,987.50.
50% of the pre-modification lease liability (` 2,10,546) is ` 1,05,273.
Consequently, Lessee reduces the carrying amount of the ROU Asset by ` 91,987.50 and the carrying amount of the
lease liability by ` 1,05,273. Lessee recognises the difference between the decrease in the lease liability and the
decrease in the ROU Asset (` 1,05,273 – ` 91,987.50 = ` 13,285.50) as a gain in profit or loss at the effective date of
the modification (at the beginning of Year 6).
Lessee recognises the difference between the remaining lease liability of ` 1,05,273 and the modified lease liability
of ` 1,29,900 (which equals ` 24,627) as an adjustment to the ROU Asset reflecting the change in the consideration
paid for the lease and the revised discount rate.
Working Note:
Calculation of Initial value of ROU asset and lease liability:
Year Lease Present value factor Present value of lease payments
Payment(A) @ 6% (B) (A x B = C)
1 50,000 0.943 47,150
2 50,000 0.890 44,500
3 50,000 0.840 42,000
4 50,000 0.792 39,600
5 50,000 0.747 37,350
6 50,000 0.705 35,250
7 50,000 0.665 33,250
8 50,000 0.627 31,350
9 50,000 0.592 29,600
10 50,000 0.558 27,900
3,67,950
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SM 36. Modification that is a change in consideration only
CA Sarthak Jain
Lessee enters into a 10-year lease for 5,000 square metres of office space. At the beginning of Year 6, Lessee and
Lessor agree to amend the original lease for the remaining five years to reduce the lease payments from ` 1,00,000
per year to ` 95,000 per year. The interest rate implicit in the lease cannot be readily determined. Lessee’s
incremental borrowing rate at the commencement date is 6% p.a. Lessee’s incremental borrowing rate at the
beginning of Year 6 is 7% p.a. The annual lease payments are payable at the end of each year.
Ans.
In the given case, Lessee calculates the ROU asset and the lease liabilities before modification as follows:
Year Opening lease liability Interest @ 6% Lease payments Closing liability
(A) (B) = [A x 6%] (C) (D) = [A+B-C]
1 7,35,900 44,154 100,000 6,80,054
2 6,80,054 40,803 100,000 6,20,857
3 6,20,857 37,251 100,000 5,58,108
4 5,58,108 33,486 100,000 4,91,594
5 4,91,594 29,496 100,000 4,21,090
6 4,21,090
(a) a five-year remaining lease term,
(b) annual payments of ` 95,000, and
Year Lease Payments (A) Present value @ 7% Present value of lease
(B) payments (A x B = C)
1 95,000 0.935 88,825
2 95,000 0.873 82,935
3 95,000 0.816 77,520
4 95,000 0.763 72,485
5 95,000 0.713 67,735
3,89,500
Lessee recognises the difference between the carrying amount of the modified liability (` 3,89,500) and
the lease liability immediately before the modification (` 4,21,090) of ` 31,590 as an adjustment to the ROU Asset.
Working Note:
Year Lease Payment Present value factor @ Present value of lease payments
1
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(A)
100,000
6% (B)
0.943
(A x B = C)
94,300
2 100,000 0.890 89,000
3 CA Sarthak Jain
100,000 0.840 84,000
4 100,000 0.792 79,200
5 100,000 0.747 74,700
6 100,000 0.705 70,500
7 100,000 0.665 66,500
8 100,000 0.627 62,700
9 100,000 0.592 59,200
10 100,000 0.558 55,800
SM 37. Modification that both increases and decreases the scope of the lease
Lessee enters into a 10-year lease for 2,000 square metres of office space. The annual lease payments are `
1,00,000 payable at the end of each year. The interest rate implicit in the lease cannot be readily determined.
Lessee’s incremental borrowing rate at the commencement date is 6% p.a.
At the beginning of Year 6, Lessee and Lessor agree to amend the original lease to:
(a) include an additional 1,500 square metres of space in the same building starting from the beginning of Year
6 and
(b) reduce the lease term from 10 years to eight years. The annual fixed payment for the 3,500 square metres
is ` 1,50,000 payable at the end of each year (from Year 6 to Year 8). Lessee’s incremental borrowing rate

at the beginning of Year 6 is 7% p.a.
The consideration for the increase in scope of 1,500 square metres of space is not commensurate with the stand-
alone price for that increase adjusted to reflect the circumstances of the contract. Consequently, Lessee does not
account for the increase in scope that adds the right to use an additional 1,500 square metres of space as a separate
lease.
Ans.
The pre-modification ROU Asset and the pre-modification lease liability in relation to the lease are as follows:
Lease liability ROU Asset
Year Opening Interest Lease Closing Opening Depreciation Closing
balance expense @ 6% payment balance balance charge balance
1 7,35,900* 44,154 (1,00,000) 6,80,054 7,35,900 (73,590) 6,62,310

2 6,80,054 40,803 (1,00,000) 6,20,857 6,62,310 (73,590) 5,88,720
3 6,20,857 37,251 (1,00,000) 5,58,108 5,88,720 (73,590) 5,15,130
4 5,58,108 33,486 (1,00,000) 4,91,594 5,15,130 (73,590) 4,41,540
5 4,91,594 29,496 (1,00,000) 4,21,090 4,41,540 (73,590) 3,67,950
6 4,21,090 3,67,950
*Refer Note 4.
At the effective date of the modification (at the beginning of Year 6), Lessee remeasures the lease liability on the
basis of:
(a) www.fast.edu.in
A three-year remaining lease term (ie. till 8th year),
(b) Annual payments of ` 150,000 and
Year CA Sarthak Jain
Lease Payments Present value @ 7% Present value of lease payments
(A) (B) (A x B = C)
1 1,50,000 0.935 1,40,250

2 1,50,000 0.873 1,30,950
3 1,50,000 0.816 1,22,400
The modified liability equals ` 3,93,600, of which (a) ` 1,31,200 relates to the increase of ` 50,000 in the annual
lease payments from Year 6 to Year 8 and (refer note 1) (b) ` 2,62,400 relates to the remaining three annual lease
payments of ` 1,00,000 from Year 6 to Year 8 with reduction of lease term (Refer Note 3)
Decrease in the lease term:

At the effective date of the modification (at the beginning of Year 6), the pre-modification ROU Asset is ` 3,67,950.
Lessee determines the proportionate decrease in the carrying amount of the ROU Asset based on the remaining
ROU Asset for the original 2,000 square metres of office space (i.e., a remaining three-year lease term rather than
the original five-year lease term). The remaining ROU Asset for the original 2,000 square metres of office space
is ` 2,20,770 [i.e., ` (3,67,950 / 5) x 3 years].
At the effective date of the modification (at the beginning of Year 6), the pre-modification lease liability is `
4,21,090. The remaining lease liability for the original 2,000 square metres of office space is ` 2,67,300 (i.e., present
value of three annual lease payments of ` 1,00,000, discounted at the original discount rate of 6% p.a.) (refer note
2).

Consequently, Lessee reduces the carrying amount of the ROU Asset by ` 1,47,180 (` 3,67,950 – `
2,20,770), and the carrying amount of the lease liability by ` 1,53,790 (` 4,21,090 – ` 2,67,300). Lessee recognises
the difference between the decrease in the lease liability and the decrease in the ROU Asset (` 1,53,790 – `
1,47,180 = ` 6,610) as a gain in profit or loss at the effective date of the modification (at the beginning of Year 6).
Lease Liability Dr. 1,53,790

To ROU Asset 1,47,180
To Gain 6,610
At the effective date of the modification (at the beginning of Year 6), Lessee recognises the effect of the
remeasurement of the remaining lease liability reflecting the revised discount rate of 7% p.a., which is ` 4,900 (`
2,67,300 – ` 2,62,400*), as an adjustment to the ROU Asset.
*(Refer note 3)
Lease Liability Dr. 4,900
To ROU Asset 4,900
Increase in the leased space:

At the commencement date of the lease for the additional 1,500 square metres of space (at the beginning of Year
6), Lessee recognises the increase in the lease liability related to the increase in leased space of ` 1,31,200 (i.e.,
present value of three annual lease payments of ` 50,000, discounted at the revised interest rate of 7% p.a.) as an
adjustment to the ROU Asset.
ROU Asset
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To Lease Liability 1,31,200
CA Sarthak Jain
The modified ROU Asset and the modified lease liability in relation to the modified lease are as follows:
Lease liability ROU Asset
Year Opening Interest Lease Closing Opening Depreciation Closing
balance expense @ 7% payment balance balance charge balance
6 3,93,600 27,552 (1,50,000) 2,71,152 3,47,100** (1,15,700) 2,31,400
7 2,71,152 18,981 (1,50,000) 1,40,133 2,31,400 (1,15,700) 1,15,700
8 1,40,133 9,867* (1,50,000) - 1,15,700 (1,15,700) -
*Difference is due to approximation.
**Refer Note 5
Working Notes:
1. Calculation of lease liability on increased consideration:
Year Lease Payments (A) Present value @7% (B) Present value of lease payments
(A x B = C)
1 50,000 0.935 46,750
2 50,000 0.873 43,650
3 50,000 0.816 40,800

2. Calculation of remaining lease liability for the original contract of 2000 square meters at Original discount
rate:
Year Lease Payments (A) Present value factor @ 6% (B) Present value of lease payments (A
x B = C)
1 1,00,000 0.943 94,300
2 1,00,000 0.890 89,000
3 1,00,000 0.840 84,000
Remaining lease liability 2,67,300
3. Calculation of remaining lease liability for the original contract of 2000 square meters at revised discount
rate:
Year Lease Payments Present value factor @ 7% Present value of lease payments
(A) (B) (A x B = C)
1 1,00,000 0.935 93,500
2 1,00,000 0.873 87,300
3 1,00,000 0.816 81,600
Remaining lease liability
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4.
Year Lease Payment
CA Sarthak Jain
Present value factor @ 6% Present value of lease payments
(A) (B) (A x B = C)
1 100,000 0.943 94,300
2 100,000 0.890 89,000
3 100,000 0.840 84,000
4 100,000 0.792 79,200
5 100,000 0.747 74,700
6 100,000 0.705 70,500
7 100,000 0.665 66,500
8 100,000 0.627 62,700
9 100,000 0.592 59,200
10 100,000 0.558 55,800
5. Calculation of opening balance of Modified ROU Asset at the beginning of 6th year:

The remaining ROU Asset for the original 2,000 square metres of office space after decrease 2,20,770
in term
Less: Adjustment for increase in interest rate from 6% to 7% (4,870)
Add: Adjustment for increase in leased space 1,31,200
3,47,100
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CA Sarthak Jain

SM 38. Lessor accounting for a finance lease ® dealer-lessor case
A Lessor enters into a 10-year lease of equipment with Lessee. The equipment is not specialised in nature and is
expected to have alternative use to Lessor at the end of the 10-year lease term. Under the lease:
§ Lessor receives annual lease payments of ` 15,000, payable at the end of the year
§ Lessor expects the residual value of the equipment to be ` 50,000 at the end of the 10-year lease term
§ Lessee provides a residual value guarantee that protects Lessor from the first ` 30,000 of loss for a sale at a
price below the estimated residual value at the end of the lease term (i.e., ` 50,000)
§ The equipment has an estimated remaining economic life of 15 years, a carrying amount of ` 1,00,000 and a
fair value of ` 1,11,000
§ The lease does not transfer ownership of the underlying asset to Lessee at the end of the lease term or contain
an option to purchase the underlying asset
§ The interest rate implicit in the lease is 10.078%.
How should the Lessor account for the same in its books of accounts?
Ans.
Lessor shall classify the lease as a FINANCE LEASE because the sum of the present value of lease payments amounts
to substantially all of the fair value of the underlying asset.
At lease commencement, Lessor accounts for the finance lease, as follows:
Net investment in the lease ` 1,11,000(a)
Cost of goods sold ` 92,340(b)
Revenue ` 1,03,340(c)
Property held for lease ` 1,00,000(d)
(a)
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To record the net investment in the finance lease and derecognise the underlying asset.
The net investment in the lease consists of:
(1) the present value of 10 annual payments of ` 15,000 plus the guaranteed residual value of `
CA Sarthak Jain
30,000, both discounted at the interest rate implicit in the lease, which equals ` 1,03,340 (i.e., the
lease payment) (Refer note 1) AND
(2) the present value of unguaranteed residual asset of ` 20,000, which equals ` 7,660 (Refer note 2).
Note that the net investment in the lease is subject to the same considerations as other assets in
classification as current or non-current assets in a classified balance sheet.
(b) Cost of goods sold is the carrying amount of the equipment of ` 1,00,000 (less) the present value of the
unguaranteed residual asset of ` 7,660.
(c) Revenue equals the lease receivable.
(d) The carrying amount of the underlying asset.
At lease commencement, Lessor recognises selling profit of ` 11,000 which is calculated as = lease payment
of ` 1,03,340 – [carrying amount of the asset (` 1,00,000) – net of any unguaranteed residual asset (`
7,660) ie which equals ` 92,340]
Year 1 Journal entry for a finance lease

Cash ` 15,000(e)
Net investment in the lease ` 3,813(f)
Interest income ` 11,187(g)
(e) Receipt of annual lease payments at the end of the year.
(f) Reduction of the net investment in the lease for lease payments received of ` 15,000, net of interest
income of ` 11,187

(g) Interest income is the amount that produces a constant periodic discount rate on the remaining balance of
the net investment in the lease. Please refer the computation below:
The following table summarises the interest income from this lease and the related amortisation of the
net investment over the lease term:
Year Annual Rental Annual Interest Income Net investment at the end of
Payment (h) the year
Initial net - - 1,11,000

investment
1 15,000 11,187 1,07,187
2 15,000 10,802 1,02,989
3 15,000 10,379 98,368
4 15,000 9,914 93,282
5 15,000 9,401 87,683
6 15,000 8,837 81,520
7 15,000 8,216 74,736
8 15,000 7,532 67,268
9 15,000 6,779 59,047
(h)
10
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15,000 5,953 50,000
Interest income equals 10.078% of the net investment in the lease at the beginning of each year. For
e.g., Year 1 annual interest income is calculated as ` 1,11,000 (initial net investment) x 10.078%.
(i)
CA Sarthak Jain
The estimated residual value of the equipment at the end of the lease term.
Working Notes:
1 Calculation of net investment in lease:
Year Lease Payment (A) Present value factor @ 10.078% (B) Present value of lease payments (A x
B = C)
1 15,000 0.908 13,620
2 15,000 0.825 12,375
3 15,000 0.750 11,250
4 15,000 0.681 10,215
5 15,000 0.619 9,285
6 15,000 0.562 8,430
7 15,000 0.511 7,665
8 15,000 0.464 6,960
9 15,000 0.421 6,315
10 15,000 0.383 5,745
10 30,000 0.383 11,480*
1,03,340

* Figure has been rounded off for equalization of journal entry.
2 Calculation of present value of unguaranteed residual asset
Year Lease Payment (A) Present value factor @ 10.078% Present value of lease
(B) payments (A x B = C)
10 20,000 0.383 7,660
SM 39. Classification of a sublease in case of an Intermediate Lessor

Entity ABC (original lessee/intermediate lessor) leases a building for five years. The building has an economic life of
40 years. Entity ABC subleases the building for four years.
How should the said sublease be classified by Entity ABC?
Ans.
The sublease is classified with reference to the ‘ROU Asset’ in the head lease (and NOT the ‘underlying building’ of
the head lease). Hence, when assessing the useful life criterion, the sublease term of four years is compared with
five-year ROU Asset in the head lease (NOT compared with 40-year economic life of the building) and accordingly
may result in the sublease being classified as a finance lease.
SM 40. Intermediate Lessor – Where the sublease is classified as a ‘Finance Lease’

Head lease:
An intermediate lessor enters into a five-year lease for 10,000 square metres of office space (the head lease) with
Entity XYZ (the head lessor).
Sublease:
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At the beginning of Year 3, the intermediate lessor subleases the 10,000 square metres of office space for the
remaining lease term i.e three years of the head lease to a sub-lessee.
How should the said sublease be classified and accounted for by the Intermediate Lessor?
Ans. CA Sarthak Jain
The intermediate lessor classifies the sublease by reference to the ROU Asset arising from the head lease (i.e., in
this case, comparing the three-year sublease with the five-year ROU Asset in the head lease). The intermediate
lessor classifies the sublease as a finance lease, having considered the requirements of Ind AS 116 (i.e., one of the
criteria of ‘useful life’ for a lease to be classified as a finance lease).
When the intermediate lessor enters into a sublease, the intermediate lessor:
(i) derecognises the ROU asset relating to the head lease that it transfers to the sublessee and recognises the
net investment in the sublease;
(ii) recognises any difference between the ROU asset and the net investment in the sublease in profit or loss;
AND
(iii) retains the lease liability relating to the head lease in its balance sheet, which represents the lease
payments owed to the head lessor.
During the term of the sublease, the intermediate lessor recognises both
• finance income on the sublease AND
• interest expense on the head lease.
SM 41. Intermediate Lessor – Where the sublease is classified as a ‘Operating Lease’

Head lease:
An intermediate lessor enters into a five-year lease for 10,000 square metres of office space (the head lease) with
Entity XYZ (the head lessor).
Sublease:

At the commencement of the head lease, the intermediate lessor subleases the 10,000 square metres of office
space for two years to a sub-lessee.
How should the said sublease be classified and accounted for by the Intermediate Lessor?
Ans.
The intermediate lessor classifies the sublease by reference to the ROU Asset arising from the head lease (i.e., in
this case, comparing the two-year sublease with the five-year ROU Asset in the head lease). The intermediate
lessor classifies the sublease as an operating lease, having considered the requirements of Ind AS 116 (i.e., one of
the criteria of ‘useful life’ for a lease to be classified as a finance lease and since, it is not satisfied, classified the
same as an operating lease).
When the intermediate lessor enters into the sublease, the intermediate lessor retains:
- the lease liability AND
- the ROU asset
both relating to the head lease in its balance sheet.
During the term of the sublease, the intermediate lessor:
(a) recognises a depreciation charge for the ROU asset and interest on the lease liability; AND
(b) recognises lease income from the sublease.
Sub-lessee Accounting:
A sub-lessee accounts for its lease in the same manner as any other lease (i.e., as a new lease subject to Ind AS
116’s recognition and measurement provisions).
SM 42. Sale and leaseback transaction
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An entity (Seller-lessee) sells a building to another entity (Buyer-lessor) for cash of ` 30,00,000. Immediately before
the transaction, the building is carried at a cost of ` 15,00,000. At the same time, Seller-lessee enters into a contract
with Buyer-lessor for the right to use the building for 20 years, with annual payments of ` 2,00,000 payable at the
end of each year.
CA Sarthak Jain
The terms and conditions of the transaction are such that the transfer of the building by Seller- lessee satisfies the
requirements for determining when a performance obligation is satisfied in Ind AS 115 Revenue from Contracts with
Customers.
The fair value of the building at the date of sale is ` 27,00,000. Initial direct costs, if any, are to be ignored. The
interest rate implicit in the lease is 12% p.a., which is readily determinable by Seller-lessee.
Buyer-lessor classifies the lease of the building as an operating lease.
How should the said transaction be accounted by the Seller-lessee and the Buyer-lessor?
Ans.
Considering facts of the case, Seller-lessee and buyer-lessor account for the transaction as a sale and leaseback.
Firstly, since the consideration for the sale of the building is not at fair value, Seller-lessee and Buyer - lessor make
adjustments to measure the sale proceeds at fair value. Thus, the amount of the excess sale price of ` 3,00,000
(as calculated below) is recognised as additional financing provided by Buyer-lessor to Seller-lessee.
Sale Price: 30,00,000
Less: Fair Value (at the date of sale): (27,00,000)
Additional financing provided by Buyer-lessor to Seller-lessee 3,00,000
Next step would be to calculate the present value of the annual payments which amounts to ` 14,94,000
(calculated considering 20 payments of ` 2,00,000 each, discounted at 12% p.a.) of which ` 3,00,000 relates to
the additional financing (as calculated above) and balance ` 11,94,000 relates to the lease — corresponding

to 20 annual payments of ` 40,164 and ` 1,59,836, respectively (refer calculations below).
Proportion of annual lease payments:

Present value of lease payments (as calculated above) (A) 14,94,000
Additional financing provided (as calculated above) (B) 3,00,000
Relating to the Additional financing provided (C) = (E x B / A) 40,160
Relating to the Lease (D) = (E – C) 1,59,840
Annual payments (at the end of each year) (E) 2,00,000
Seller-Lessee:
At the commencement date, Seller-lessee measures the ROU asset arising from the leaseback of the building at the
proportion of the previous carrying amount of the building that relates to the right-of-use retained by Seller-lessee,
calculated as follows:
Carrying Amount (A) 15,00,000
Fair Value (at the date of sale) (B) 27,00,000
Discounted lease payments for the 20-year ROU asset (C) 11,94,000
ROU Asset [(A / B) x C] 6,63,333
Seller-lessee recognises only the amount of the gain that relates to the rights transferred to Buyer- lessor,
calculated as follows:
Fair Value (at the date of sale)
www.fast.edu.in (A) 27,00,000
Carrying Amount (B) 15,00,000
CA Sarthak Jain
Discounted lease payments for the 20-year ROU asset (C) 11,94,000
Gain on sale of building (D) = (A - B) 12,00,000
Relating to the right to use the building retained by Seller-lessee (E) = [(D / A) x C] 5,30,667
Relating to the rights transferred to Buyer-lessor (D - E) 6,69,333
At the commencement date, Seller-lessee accounts for the transaction, as follows:

Cash Dr. 30,00,000
To Building 15,00,000
To Financial Liability 14,94,000
To Gain on rights transferred 6,69,333
Buyer-Lessor:
At the commencement date, Buyer-lessor accounts for the transaction, as follows:
Building Dr. 27,00,000
Financial Asset (20 payments of ` 40,160 3,00,000
discounted @ 12% p.a.) (approx.) Dr.
To Cash 30,00,000

After the commencement date, Buyer-lessor accounts for the lease by treating ` 1,59,840 of the annual payments
of ` 2,00,000 as lease payments. The remaining ` 40,160 of annual payments received from Seller-lessee are
accounted for as:
(a) payments received to settle the financial asset of ` 3,00,000 AND
(b) interest revenue.
SM 43. Transition Approaches
A retailer (lessee) entered into 3-year lease of retail space beginning at 1 April 2017 with three annual lease
payments of ` 2,00,000 due on 31 March 2018, 2019 and 2020, respectively. The lease is classified as an operating
lease under Ind AS 17. The retailer initially applies Ind AS 116 for the first time in the annual period beginning at 1
April 2019. The incremental borrowing rate at the date of the initial application (i.e., 1 April 2019) is 10% p.a. and at
the commencement of the lease (i.e., 1 April 2017) was 12% p.a. The ROU asset is subject to straight-line
depreciation over the lease term. Assume that no practical expedients are elected, the lessee did not incur initial
direct costs, there were no lease incentives and there were no requirements for the lessee to dismantle and
remove the underlying asset, restore the site on which it is located or restore the underlying asset to the condition
under the terms and conditions of the lease.
What would be the impact for the lessee using all the following transition approaches: Full Retrospective Approach
Modified Retrospective Approach
- Alternative 1
- Alternative 2
Ans.
Full Retrospective Approach:
Under the full retrospective approach, the lease liability and the ROU asset are measured on the commencement
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date (i.e., 1 April 2017 in this case) using the incremental borrowing rate at lease commencement date (i.e., 12%
p.a. in this case). The lease liability is accounted for by the interest method subsequently and the ROU asset is
subject to depreciation on the straight-line basis over the lease term of three years. Let us first calculate the Lease
Liability and ROU Asset as follows:
CA Sarthak Jain
Year Payments Present Value Factor Discounted Cash flows
(Cash flows) @12% / Present Value
31 Mar 2018 2,00,000 0.8929 1,78,580
31 Mar 2019 2,00,000 0.7972 1,59,440
31 Mar 2020 2,00,000 0.7118 1,42,360
6,00,000 4,80,380
Lease Liability Schedule:

Year Opening Interest Expense @ 12% Payments Closing
31 Mar 2018 4,80,380 57,646 (2,00,000) 3,38,026
31 Mar 2019 3,38,026 40,563 (2,00,000) 1,78,589
31 Mar 2020 1,78,589 21,411* (2,00,000) -
*Difference is due to approximation
ROU Asset Schedule:

Year Opening Depreciation Closing

31 Mar 2018 4,80,380 (1,60,126) 3,20,254

31 Mar 2019 3,20,254 (1,60,127) 1,60,127
31 Mar 2020 1,60,127 (1,60,127) -
The following table shows account balances under this method beginning at lease commencement:
Date ROU Lease Interest Depreciation Retained

Asset Liability Expense Expense Earnings
01 Apr 2017 4,80,380 4,80,380 - - -

31 Mar 2018 3,20,254 3,38,026 - - -
01 Apr 2018 3,20,254 3,38,026 (17,772)
31 Mar 2019 1,60,127 1,78,589 40,563 1,60,127 -
01 Apr 2019 1,60,127 1,78,589 - - -
31 Mar 2020 - - 21,411 1,60,127 -
Ind AS 116 is applicable for the financial year beginning from 1st April 2019. Hence, 2019-20 is the first year of
adoption and using Full retrospective method the comparative for 2018-19 needs to be restated and 1st April
2018 (i.e the opening of the comparative) is taken as transition date for adoption of this standard. At adoption, the
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lessee would record the ROU asset 1and lease liability at the 1 April 2018 by taking values from the above table,
with the difference between the ROU asset and lease liability going to retained earnings as of 1 April 2018
(assuming that only the 2018-19 financial information is included as comparatives).
CA Sarthak Jain
Retained Earnings Dr. 17,772
To initially recognise the lease-related asset and liability as of 1 April 2018.
The following journal entries would be recorded during 2018-19:

Interest expense Dr. 40,563
To record interest expense and accrete the lease liability using the interest method.
Depreciation expense Dr. 1,60,127
To record depreciation expense on the ROU asset.
To Cash 2,00,000
To record lease payment.



To Cash 2,00,000
Modified Retrospective Approach (Alternative 1):

Under the modified retrospective approach (Alternative 1), the lease liability is measured based on the remaining
lease payments (i.e., from the date of transition to the lease end date, viz., 01 April 2019 to 31 March 2020 in
this case) discounted using the incremental borrowing rate as of the date of initial application being 01 April 2019
(i.e. 10% p.a. in this case). The ROU asset is at its carrying amount as if Ind AS 116 had been applied since the
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commencement date (i.e., 01 April 2017 in this case) by using incremental borrowing rate as at transition date. Let
us first calculate the Lease Liability and ROU Asset as follows:
Year Payments Discounting Factor @10% Discounted Cash flows
CA Sarthak Jain
(Cash flows) / Present Value
31 Mar 2020 2,00,000 0.9091 1,81,820
2,00,000 1,81,820

Year Opening Balance Interest Payments Closing Balance
Expense @ 10%
31 Mar 2020 1,81,820 18,182 (2,00,000) -
ROU Asset Schedule:

Year Opening Balance Depreciation Closing Balance
31 Mar 2020 1,65,790*** (1,65,790) -
***(Refer note no 3)
Date ROU Asset Lease Liability Interest Depreciation Retained
Expense Expense Earnings
01 Apr 2017 4,97,360* 4,97,360** - - -

31 Mar 2018 3,31,574 3,47,096 49,737 1,65,786 -

31 Mar 2019 1,65,787 1,81,806 34,710 1,65,787 (16,019)
01 Apr 2019 1,65,787 1,81,806 - - -
31 Mar 2020 - - 18,194 1,65,787 -
*(Refer note no 1)
**(Refer note no 2)
At adoption, the lessee would record the ROU asset and lease liability at the 1 April 2019 by taking values from the
above table, with the difference between the ROU asset and lease liability going to retained earnings as of 1 April
2019.
Retained Earnings Dr. 16,019

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To ROU Asset CA Sarthak Jain 1,65,787

To Cash 2,00,000
Note 1:
Calculation of Present value of lease payments as at commencement date i.e., 01/04/2017
Year Payments Discounting Factor @10% Discounted Cash flows

(Cash flows) / Present Value
31 Mar 2018 2,00,000 0.9091 1,81,820
31 Mar 2019 2,00,000 0.8264 1,65,280
31 Mar 2020 2,00,000 0.7513 1,50,260
6,00,000 4,97,360

Year Opening Interest Expense Payments Closing
@ 10%
31 Mar 2018 4,97,360 49,736 (2,00,000) 3,47,096
31 Mar 2019 3,47,096 34,710 (2,00,000) 1,81,806
31 Mar 2020 1,81,806 18,194* (2,00,000) -
*Difference is due to approximation
Calculation of ROU asset as at transition date i.e., April 01, 2019
31 Mar 2018 4,97,360 (1,65,786) 3,31,574
31 Mar 2019 3,31,574 (1,65,787) 1,65,787
31 Mar 2020 1,65,787 (1,65,787) -
Modified Retrospective Approach (Alternative 2):

Under the modified retrospective approach (Alternative 2), the lease liability is also measured based on the
remaining lease payments (i.e., from the date of transition to the lease end date, viz., 01 April 2019 to 31 March
2020 in this case) discounted using the incremental borrowing rate as of the date of initial application being 01
April 2019 (i.e. 10% p.a. in this case). The carrying amount of the ROU asset is an amount equal to the carrying
amount of the lease liability on the date of initial application as there are no prepayments or accrual items and
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hence, no impact on retained earnings as on the transition date. Let us first calculate the Lease Liability and ROU
Asset as follows:
Year CA Sarthak Jain

Payments (Cash Discounting Factor Discounted Cash
flows) @ 10% flows / Present
Value
31 Mar 2020 2,00,000 0.9091 1,81,820
2,00,000 1,81,820

Year Opening Interest Expense Payments Closing
31 Mar 2020 1,81,820 18,182 (2,00,000) -
ROU Asset Schedule:

31 Mar 2020 1,81,820 (1,81,820) -

Date ROU Lease Liability Interest Depreciation Retained

Asset Expense Expense Earnings
01 Apr 2019 1,81,820 1,81,820 - - -

31 Mar 2020 - - 18,182 1,81,820 -
At adoption, the lessee would record the ROU asset and lease liability at the 1 April 2019 by taking values from the
above table and there will be no impact on retained earnings on the transition date being 1 April 2019 since under
this alternative, ROU Asset is equal to the Lease Liability.


To ROU Asset www.fast.edu.in 1,81,820
Lease Liability
To Cash
CA Sarthak JainDr. 2,00,000
2,00,000
A summary of the lease contract’s accounting (assuming there are no changes due to reassessments) is, as follows:
Particulars Full Retrospective Modified Retrospective Modified Retrospective
Approach Approach Approach
(Alternative 1) (Alternative 2)
Opening balance sheet impact as on 1 April 2019:
ROU Asset 1,60,126 1,65,787 1,81,820
Lease Liability 1,78,589 1,81,806 1,81,820
Period ended 31 March 2020 activity:
Cash lease payments 2,00,000 2,00,000 2,00,000
Lease payments recognised:
Interest expense 21,411 18,194 18,182
Depreciation expense 1,60,127 1,65,787 1,81,820
Total periodic expense 1,81,538 1,83,981 2,00,002

SM 44. A lessee enters into a ten-year contract with a lessor (freight carrier) to transport a specified quantity of goods.
Lessor uses rail wagons of a particular specification, and has a large pool of similar rail wagons that can be used to
fulfil the requirements of the contract. The rail wagons and engines are stored at lessor’s premises when they are
not being used to transport goods. Costs associated with substituting the rail wagons are minimal for lessor.
Whether the lessor has substantive substitutions rights and whether the arrangement contains a lease?
Ans.
In this case, the rail wagons are stored at lessor’s premises and it has a large pool of similar rail wagons and
substitution costs to be incurred are minimal. Thus, the lessor has the practical ability to substitute the asset. If at
any point, the same become economically beneficial for the lessor to substitute the wagons, he can do so and
hence, the lessor’s substitution rights are substantive and the arrangement does not contain a lease.
SM 45. Customer M enters into a 20-year contract with Energy Supplier S to install, operate and maintain a solar plant for
M’s energy supply. M designed the solar plant before it was constructed – M hired experts in solar energy to assist
in determining the location of the plant and the engineering of the equipment to be used. M has the exclusive right
to receive and the obligation to take any energy produced. Whether it can be established that M is having the right
to control the use of identified asset?
Ans.
In this case, the nature of the solar plant is such that all of the decisions about how and for what purpose the asset
is used are predetermined because:
– the type of output (i.e. energy) and the production location are predetermined in the agreement; and
– when, whether and how much energy is produced is influenced by the sunlight and the design of the solar
plant.
Because M designed the solar plant and thereby predetermined any decisions about how and for what purpose it is
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used, M is considered to have the right to direct the use. Although regular maintenance of the solar plant may
increase the efficiency of the solar panels, it does not give the supplier the right to direct how and for what purpose
the solar plant is used. Hence, M is having a right to control the use of asset.
CA Sarthak Jain
SM 46. A Customer enters into a ten-year contract with a Company (a ship owner) for the use of an identified ship.
Customer decides whether and what cargo will be transported, and when and to which ports the ship will sail
throughout the period of use, subject to restrictions specified in the contract. These restrictions prevent the
company from sailing the ship into waters at a high risk of piracy or carrying explosive materials. The company
operates and maintains the ship, and is responsible for safe passage.
Does the customer has the right to direct how and for what purpose the ship is to be used throughout the period of
use and whether the arrangement contains a lease?
Ans.
The customer has the right to direct the use of the ship because the contractual restrictions are merely protective
rights that protect the company’s investment in the ship and its personnel. In the scope of its right of use, the
customer determines how and for what purpose the ship is used throughout the ten-year period because it decides
whether, where and when the ship sails, as well as the cargo that it will transport.
The customer has the right to change these decisions throughout the period of use and hence, the contract contains
a lease.
SM 47. A Lessee enters into a ten-year lease contract with a Lessor to use an equipment. The contract includes
maintenance services (as provided by lessor). The Lessor obtains its own insurance for the equipment. Annual
payments are ` 10,000 (` 1,000 relate to maintenance services and ` 500 to insurance costs).
The Lessee is able to determine that similar maintenance services and insurance costs are offered by third parties
for ` 2,000 and ` 500 a year, respectively. The Lessee is unable to find an observable stand-alone rental amount for
a similar equipment because none is leased without related maintenance services provided by the lessor.
How would the Lessee allocate the consideration to the lease component?

Ans.
The observable stand-alone price for maintenance services is ` 2,000. There is no observable stand-alone price for
the lease. Further, the insurance cost does not transfer a good or service to the lessee and therefore, it is not a
separate lease component.
SM 48. A Lessee enters into a non-cancellable lease contract with a Lessor to lease a building. Initially, the lease is for five
years, and the lessee has the option to extend the lease by another five years at the same rental.
To determine the lease term, the lessee considers the following factors:
• Market rentals for a comparable building in the same area are expected to increase by 10% over the ten-year
period covered by the lease. At inception of the lease, lease rentals are in accordance with current market
rents.
• The lessee intends to stay in business in the same area for at least 20 years.
• The location of the building is ideal for relationships with suppliers and customers.
What should be the lease term for lease accounting under Ind AS 116?
Ans.
After considering all the stated factors, the lessee concludes that it has a significant economic incentive to extend
the lease.
Thus, for the purpose of lease accounting under Ind AS 116, the lessee uses a lease term of ten years.
SM 49. A Lessee enters into a lease of a five-year-old machine. The non-cancellable lease term is 15 years. The lessee has
the option to extend the lease after the initial 15-year period for optional periods of 12 months each at market
rents.
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To determine the lease term, the lessee considers the following factors:
• The machine is to be used in manufacturing parts for a type of plane that the lessee expects will remain popular
with customers until development and testing of an improved model are completed in approximately 15 years.
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• The cost to install the machine in lessee’s manufacturing facility is significant.
• The non-cancellable term of lessee’s manufacturing facility lease ends in 19 years, and the lessee has an option
to renew that lease for another twelve years.
• Lessee does not expect to be able to use the machine in its manufacturing process for other types of planes
without significant modifications.
• The total remaining life of the machine is 30 years.
What should be the lease term for lease accounting under Ind AS 116?
Ans.
The lessee notes that the terms for the optional renewal provide no economic incentive and the cost to install is
significant. The lessee has no incentive to make significant modifications to the machine after the initial 15-year
period. Therefore, the lessee does not expect to have a business purpose for using the machine after the non-
cancellable lease term of 15 years.
Thus, the lessee concludes that the lease term consists of the 15-year non-cancellable period only.
SM 50. A Company leases a manufacturing facility. The lease payments depend on the number of operating hours of the
manufacturing facility, i.e., the lessee has to pay ` 2,000 per hour of use. The annual minimum payment is `
2,00,00,000. The expected usage per year is 20,000 hours.
Whether the said payments be included in the calculation of lease liability under Ind AS 116?
Ans.
The said lease contains in-substance fixed payments of ` 2,00,00,000 per year, which are included in the initial
measurement of the lease liability under Ind AS 116.

However, the additional ` 2,00,00,000 that the company expects to pay per year are variable payments that do not
depend on an index or rate and, thus, are not included in the initial measurement of the lease liability but, are
expensed when the over-use occurs.
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Ind AS 116
LEASES
CONCEPT BUILDERS
IDENTIFIABLE ASSET
CB 1. Entity X (PNG provider) enters into an arrangement for 15 years with Entity Y for using 60 % of the capacity of
a gas pipeline. The quantity of gas which is to be sent in the pipeline is decided by Entity X. Entity Y makes all
decisions regarding operation and maintenance of the pipeline. Entity X pays a fixed capacity charge per month
and a variable amount which depends on the quantity of gas transported. Entity Y may allow third parties to use
the remaining unused 40 % capacity only if Entity X refuses to utilise the same, i.e., Entity X has the right of first
refusal.
Whether the pipeline meets the criterion of an identified asset?
Ans.
CB 2. Entity X (Customer) enters into a contract with Entity Y (Supplier) for a period of ten years for the right to use a
vehicle. The vehicle is explicitly specified in the contract. Whether Entity Y has substantive substitution rights in
each of the following scenarios?
Scenario 1: Entity Y has no substitution rights for first four years from the commencement of the contract.
However after four years, Entity Y can substitute the vehicle at any time.
Scenario 2: Entity Y has a right to substitute the vehicle only on the occurrence of a particular event, i.e., in case
of breakdown of the vehicle.
Ans. www.fast.edu.in
CB 3. Entity Y owns a large shopping centre. Customer X enters into a contract to lease a specified retail space for
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five years. Under the contract, Entity Y can require X to relocate to another retail space within the shopping
centre. Entity Y would need to pay for costs of relocation and provide X with another space of similar attributes.
Entity Y would only benefit economically from relocating X if a major new tenant were to move in, taking up a
large amount of space at a sufficiently higher rate than the existing tenants. Although it is possible that those
circumstances may arise, at inception of the contract, it is not likely that those circumstances will arise.
Whether Entity Y has substantive substitution rights?

Ans.
RIGHT TO CONTROL USE OF ASSET
CB 4. Entity X (customer) enters into an arrangement for a period of five years with Entity Y (supplier) for the right to
store its gas in a specified storage tank that has no separate compartments. At inception of the contract, Entity
X has storage rights that permit it to use 60% of the capacity of the storage tank throughout the term of the
contract. Entity Z, subsidiary of Entity X, has arrangement with Entity Y to use balance 40% capacity of that
same storage tank throughout the term of the contract.
Whether there is an identified asset and whether the arrangement would be a lease:
• in the respective stand-alone financial statements of Entity X and Entity Z.
• in the consolidated financial statements of Entity X.
Will the answer be different if Entity Z is an associate or joint venture of Entity X, and not a subsidiary of Entity
X?
Ans.
Inception date vs Commencement date
CB 5. Entity X (lessee) entered into a franchise agreement with Entity Y (franchisor-lessor) for opening a new store in
the premises owned by Entity Y. The agreement is dated April 1, 2019. As per the contract, Entity X is required
to make lease payments beginning from July 1, 2019 when the store is expected to open. Before the store
opening, Entity X has to make some leasehold improvements to structure the store as per its requirements for
which Entity Y provides the premises from May 1, 2019.
Entity X has concluded that the arrangement contains a lease for the premises.
When will Entity X recognise the right-of-use asset and the lease liability relating to the lease?
Ans.
LEASE TERM
Termination option
CB 6. Entity X (lessee) enters into a lease for a major new store location with Entity Y (lessor) for an unspecified period
of time. As per the terms of contract, the lease can be terminated at any time by Entity X by giving eight months’
notice prior to terminating the lease and pay a penalty equal in amount to two months’ rent. The lease rentals
will be reset every year to market rates.
Entity X is not expected to benefit economically from shifting the store to a new location, as it has undertaken
significant immovable leasehold improvements and which can be effectively utilised, only if it continues the
lease for at least five years. Entity X has internally budgeted the revenue from this outlet for next five years.
What is the lease term from the perspective of Entity X?

Ans.
Cancellable leases
CB 7. www.fast.edu.in
In the following scenarios what will be the lease term?
Scenario I:
A lease has a contract period of five years but can be terminated any time after the end of the third year at the
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option of the lessor or the lessee without incurring any significant penalty.
Scenario II:
A lease has an initial contract period of five years but can be terminated by the lessor at any time after the end
of the third year without requiring the lessee’s consent.
Ans.
Residual value guarantee

CB 8. Entity X (lessee) enters into a contract with Entity Y to lease a machinery for a term of five years, with Entity Y
having an option to terminate the lease at the end of three years. Under the agreement, Entity X guarantees to
Entity Y that if Entity X terminates the lease at the end of three years and the residual value of the underlying
asset at the end of three years is less than INR 2 lakhs, it will compensate Entity Y for the shortfall.
What will be the lease term?

Ans.
Perpetual Lease
CB 9. Airline X (lessee) has entered into a lease arrangement with Entity Y (lessor) to take an aircraft on lease for
which it pays monthly rental to Entity Y. There are no termination clauses for the contract, except in case of
default in rental payment by the lessee. What is the lease term?
Ans.
Contracts with term of 12 months or less

CB 10. Several years back, Entity X (lessee) entered into a lease agreement to take on lease an office building from
Entity Y (lessor) for a period of eleven months with no renewal terms. Since then, the contract has been renewed
(by entering into a fresh lease agreement) by mutual consent of the parties for a further period of eleven months
at a time at the expiry of its current term On expiry of previous lease agreement, a fresh lease agreement is
entered into on April 15, 2019. Based on the historical experience, it is considered likely that the contract will be
renewed for another eleven months at the expiry of its current term.
The lease agreement does not provide any purchase option in respect of the leased asset to the lessee.
What is the lease term?
Ans.
Reassessment of lease term

CB 11. In the following scenarios when will the least term be reassessed?
Scenario I: Re-assessment of exercise of lease extension option

Entity X (lessee) enters into a lease for a building floor for its corporate office for an initial period of five years,
followed by three successive five-year renewal options. At the commencement date, Entity X is not reasonably
certain to exercise the renewal option. During the third year, Entity X acquired a business.
Entity X assessed that the employees of the new business acquired and the existing employees need to be
present at the same location and cannot efficiently operate from different locations. Accordingly, at the end of
third year, Entity X decided to lease another floor from the beginning of year 4 in the same building and entered
into a separate seven-year lease for the additional floor in the building.
Scenario B: Re-assessment of non-cancellable period of lease

Entity X (lessee) takes ten vehicles on lease for an initial period of 5 years along with an option to extend the
lease for a further period of 5 years at the same rental amount. The remaining useful life of each of the vehicles
as at the commencement date of the lease is 12 years. Entity X determines at the commencement date that it
is reasonably certain to exercise the extension option and hence it takes the lease term as ten years.
At the end of year 3, there is an announcement by the government that all the vehicles of this particular model
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have to be taken off the road within next one year due to the change in the pollution norms in the country.
The agreement states that it shall stand terminated if either of the party is prevented in performing its obligations
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under the terms of the agreement by reason of any restrictive governmental laws or regulations, riots,
insurrection, war, terrorist action, strike, public demonstrations, rallies, acts of God etc.?
Ans.
LEASE PAYMENTS
Initial Measurement: In-substance fixed lease payment

CB 12. Entity X (lessee) enters into a five-year lease for a machinery. The contract sets out the lease payments as
follows:
- If Entity X uses the machinery within a given month, then an amount of INR 20,000 accrues for that month.
₋ If Entity X does not use the machinery within a given month, then an amount of INR 10,000 accrues for that
month.
- Payments are to be made at the end of the year.
What amount would be considered to be the lease payments for the purpose of measuring lease liability?
Ans.
Variable lease payments

CB 13. Entity X (lessee) enters into a lease arrangement for a period of 10 years to lease a retail office space with
Entity Y (lessor). The annual lease payments, to be paid in arrears at the end of each year are INR 2 lakhs plus
an amount equal to 5% of Entity X’s sales for the year. Entity X’s annual sales have always exceeded INR 2
crores ever since it began operations and are projected to grow at a rate of 10% annually. What are the lease
payments for purposes of calculating lease liability and right-of-use asset?
Ans.
LESEE ACCOUNTING
Allocation of consideration - Property taxes

CB 14. Entity X (lessee) enters into an agreement with Entity Y (lessor) for a period of five years to lease a portion of a
building. Entity X is required to make a fixed annual lease payment of INR 3,50,000 (i.e., total payment of INR
17,50,000 over the five-year term). As per the terms of the contract, the INR 3,50,000 annual payment
comprises:
INR
Bulding rent 2,00,000
Comonarea maintenance services charge 70,000
Property taxes (pro-rata) 50,000
Building insurance (pro-rata) 30,000
From Entity X’s perspective, the estimated stand-alone price of the building rent is INR 2,20,000, and the
estimated stand-alone price of the common area maintenance service is INR 80,000 Entity X has not elected
to apply the practical expedient in paragraph 15 of Ind AS 116 of not to separate nonlease component (s) from
lease component(s) and accordingly it separates non-lease components from lease components.
Whether the property taxes paid by lessee should be considered as a part of lease payment?
Ans.
Goods and Services Tax (GST)

CB 15. Entity X (lessee) enters into an agreement with Entity Y to lease an entire floor of a building for a period of 10
years. The annual lease payments are fixed at INR 30,00,000 and are required to be paid in advance. In
addition, Entity X shall pay Goods and Services Tax (GST) at 18% to Entity Y, who will remit the tax to the
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applicable government. GST is non-refundable and Entity X cannot claim the input tax credit for the GST
payment.
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Whether the payment of GST is considered as a part of consideration paid by Entity X? How will Entity X account
for the GST payments?
Ans.
Variable lease payments dependent on an index

CB 16. Entity X (lessee) enters into an arrangement to lease a property for a period of 10 years. As per arrangement,
the annual lease payments of INR 50,000 are payable at the beginning of each year. The arrangement specifies
that lease payments will increase every two years on the basis of the increase in the Consumer Price Index
(CPI) for the preceding 24 months.
The Consumer Price Index at the commencement date is 125. The interest rate implicit in the lease is not readily
determinable. Entity X expects to obtain economic benefits from the right of use evenly over the term of the
lease and accordingly amortises the right of use on a straight-line basis.
Entity X’s incremental borrowing rate is 5 per cent per annum, which reflects the fixed rate at which Entity X
could borrow an amount similar to the value of the right-of-use asset (ROU), in the same currency, for a 10-year
term, and with similar collateral. At the beginning of the third year of the lease, the Consumer Price Index is
135.
How will Entity X measure its lease liability and ROU asset as at commencement date and subsequently?
Ans.
Modification in Lease - Reduction of Scope

CB 17. Entity X (lessee) enters into an arrangement to lease an office space measuring 5,000 sq. ft. The annual lease
rentals are paid in arrears amounting to INR 5,00,000. Lessee’s incremental borrowing rate at commencement
date is 12% p.a. At the beginning of year 6, the lease agreement is amended to reduce the leased space to
3000 sq. ft. On account of reduction in space, annual lease rentals are also reduced (from year 6 to year 10) to
INR 3,50,000. Lessee’s incremental borrowing rate at beginning of year 6 is 10% p.a.
How would Entity X account for the modification of lease?

Ans.
Lease modification – Reduction in lease term

CB 18. Entity X (lessee) enters into an arrangement to lease an office space measuring 2,000 sq. ft. for a period of 10
years. Entity X makes the annual lease payments of INR 100,000 p.a. in arrears. The lessee’s incremental
borrowing rate at the commencement of the lease is 10% p.a.
Entity X enters into a lease modification at beginning of year 6 whereby the total term of the contract is reduced
from 10 to 8 years. The annual lease payments for the space measuring 2,000 sq. ft. remains unchanged at
INR 100,000 p.a. The lessee’s incremental borrowing rate at beginning of year 6 is 11% p.a.
How will Entity X account for the changes in the terms of the lease?
Ans.
SCOPE & EXEMPTIONS
CB 19. Whether the following rights obtained by Entity X would be within the scope of Ind AS 116?
(a) Rights to explore for oil and use oil from an oilfield Y for 25 years
(b) Rights to access the land which contains tha oil (“surface lease”)
(c) Right to lay down water pipelines over the surface of the land adjacent to the land which contains oil field.
Entity X requires water in the oil extraction process).
Ans.
CB 20. Entity X, a private sector entity, enters into a contract with the Transport Ministry (the grantor) of Country S to
acquire the right to operate the civil air navigation system in Country S. Under this contract:
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- the grantor provides the air navigation system;
- X is required to upgrade the system;
- X will charge users based on rates negotiated directly by it with individual users;
- there is no price-cap mechanism imposed by the grantor; and
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- the contract is for a period of 10 years.
Whether the contract would be within the scope of Ind AS 116?

Ans.
CB 21. Entity X (lessee) manufactures phone handsets. X enters into a 10-year lease contract with Entity Y (lessor) of
a non-specialised machine to be used in manufacturing parts for phone A1. It expects this model of phone to
remain popular with customers until it completes development and testing of an upgraded model - phone A2,
which is expected to be launched in the near future, i.e., within one year. The current machine can be easily
replaced and the cost to install it in X's manufacturing facility is not significant. X and Y each have the right to
terminate the lease without a penalty on each anniversary of the lease commencement date. The lease
agreement does not provide any purchase option in respect of the leased asset to Entity X.
Whether the recognition exemption for ‘short term leases’ as per paragraph 5 of Ind AS 116 is available to Entity
X?
Would the answer be different, if the development and testing of the upgraded model is expected to be
completed in three years rather than one year?
Ans.
Lease of low value assets

CB 22. Entity X is in the business of manufacturing and selling fast-moving consumer goods (FMCG) and has entered
into the following lease arrangements as lessee:
(a) Leases of office buildings and warehouses.
(b) Leases of manufacturing plant and machinery.
(c) Leases of vehicles such as cars for employees and senior managements and of varying quality,
specifications and value.
(d) Leases of trucks and vans used for delivery purposes, of varying size and value.
(e) Leases of laptop computers, desktop computers and mobile phones for employees.
(f) Leases of high-end servers, including many individual modules that increase the storage capacity of those
servers. The modules have been added to the mainframe servers over time as Lessee has needed to increase
the storage capacity of the servers.
(g) Leases of office equipment:
(i) office furniture (such as chairs, desks and office partitions);
(ii) water dispensers; and
(iii) high-capacity multifunction photocopier devices.
Does each of the above assets qualify to be a low value asset and whether Entity X can elect to apply the low-
value asset exemption to all of the assets in the contract?
Ans.
Short-term lease exemption

CB 23. Entity X has entered into lease agreements to lease several items of office equipment. The items of office
equipment are all considered to be of the same class as they are of similar nature and use in Entity X’s operation.
The lease term of some of the items is 12 months or less, with no renewal option. The lease agreement does
not provide any purchase option in respect of the leased asset to Entity X.
For which of the leases can Entity X exercise the short term lease exemption?
Ans.
Measurement in case of recognition exemption

CB 24. Entity X (lessee) enters into a lease agreement with Entity Y (lessor) to lease office equipment for a lease term
of 5 years. The equipment is determined by Entity X to be of low value. Entity X elects to apply low value asset
exemption. Lease payments for five years are as follows:
Year 1 - Nil (rent-free)

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Year 2 & 3 - INR 1,000 p.a.
Year 4 & 5 - INR 1,200 p.a.
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The escalations in lease rentals for years 4 and 5 are in line with the expected inflation rates in the economy.
Entity Y provides a lease incentive of INR 300 to Entity X at lease commencement.
How would the lease payments and lease incentive be recognized by Entity X?
Ans.
LESSOR ACCOUNTING
CB 25. Finance Lease :Plain Lessor:
SBI finance an aircraft on lease to Jaat Airlines . FMV of the aircraft was ` 50 crores. Lease rentals is ` 20
crores p.a. for 3 years. Life of asset is 10 years. Tital will be tif to lessor after 3 years.
Show accounting in the books of lessor (SBI) and Lessee(JAAT airlines)
Operating Leases
CB 26. On 1 April 20X1, Mercury Ltd leased a machine from Pluto Ltd on a three-year lease. The expected future
economic life of the machine on 1 April 20X1 was eight years. If the machine breaks down, then under the terms
of the lease, Pluto Ltd would be required to repair the machine or provide a replacement. Pluto Ltd agreed to
allow Mercury Ltd to use the machine for the first six months of the lease without the payment of any rental as
an incentive to Mercury Ltd to sign the lease agreement. After this initial period, lease rentals of ` 2,10,000 were
payable six-monthly in arrears, the first payment falling due on 31 March 20X2.
Required:
Explain the treatment required in accordance of Ind AS 116 in the financial statements of Mercury Ltd for the
year ended 31 March 20X2
CB 27. Operating Lease

Asset taken on lease for 5 years lease rentals being 1lakhs, 2lakhs, 3lakhs, 4lakhs and 5lakhs for respective
years. Cost of Asset for lessor 25 lakhs. Life of asset 20 years. Show accounting in the books of lessor.
CB 28. Operating Lease

Entity Y (the lessor) enters into an operating lease agreement with Entity X (the lessee) for an office space. The
term of the lease agreement is three years. The lease rental is fixed at INR 20,000 per month for the first year,
with an escalation adjustment of 6% at the end of years 1 and 2. Therefore, the lease rentals payable are fixed
as follows:
Year 1: INR 20,000 per month
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Entity Y assesses that based on practice in the local area, these annual escalations reflect the potential
increases in general inflation index over the period of the lease agreement. How will the above payments be
accounted for by Entity Y?
Ans.
Accounting for lease incentives – Operating Lease

CB 29. How will Entity Y account for the incentive in the following scenarios?
Scenario A:
Entity Y (lessor) enters into an operating lease of property with Entity X (lessee) for a five-year term at a monthly
rental of INR 1,10,000. In order to induce Entity X to enter into the lease, Entity Y provides INR 600,000 to Entity
X at lease commencement for lessee improvements (i.e., lessee assets).
Scenario B:
Entity Y (lessor) enters into an operating lease of property with Entity X (lessee) for a five-year term at a monthly
rental of INR 1,10,000. At lease commencement, Entity Y provides INR 600,000 to Entity X for leasehold
improvements which will be owned by Entity Y (i.e., lessor’s assets). The estimated useful life of leasehold
improvements is 5 years.
Ans.
Lessor’s accounting for lease modifications: Finance leases

CB 30. Entity X (lessee) entered into a contract with Entity Y (lessor) to lease an office equipment for a period of 5
years.
The following table summarises information about the lease and the leased assets at lease inception.
Lease term 5 years; no renewal option held by either party
Economic life of the leased equipment 10 years
Purchase option None
Annual lease payments INR 1,95,000
Payment date Annually on April 1
Fair value of the leased equipment INR 12,00,000
Entity Y’s carrying amount of the leased equipment INR 12,00,000
Estimated residual value at the end of 5 years INR 4,00,000
Residual value guarantee at the end of 5 years INR 3,00,000 residual value guarantee is provided
by a third party unrelated to Entity X or Entity Y
Interest rate charged in the lease 5%
Other Title to the assest remains with Entity Y
At lease commencement, Entity Y concluded that the lease is a finance lease because it transfers substantially
all the risks and rewards incidental to ownership of an underlying asset to lessee Therefore, Entity Y initially
recognised a net investment in the lease of INR 12,00,000 and derecognized the carrying value of the equipment
of INR 12,00,000.
At the end of year 1 of the lease, Entity X and Entity Y agree to modify the lease to shorten the lease term by
two years. The relevant information at the modification date is shown in the following table.
Modification date Beginning of year 2

Remaining modified lease term 2 years; no renewal option held by either party
Remaining economic life of the leased equipment 7 years
Purchase option None
Annual lease payments INR 1,90,000
Payment date Annually on April 1
Fair value of the leased equipment INR 10,00,000
Entity Y’s carrying amount of net investment in the INR 10,55,201 (interest income of INR 50,201 was
lease on the modification date recorded in the first year of the lease)
Estimated residual value at the end of next 2 years INR 7,00,000
Residual value guarantee at the end of next 2 years INR 3,50,000 residual value guarantee is provided by
a third party unrelated to Entity X or Entity Y
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Interest Rate implicit in the modified lease 5.43%
The modified lease consideration is at a discount to the current market rate for the additional term for this
particular lease contract.
Ans.
CA Sarthak Jain
How would Entity Y account for the lease modification?
Lessor’s accounting for lease modifications: Operating leases

CB 31. Entity X (lessee) enters into an arrangement with Entity Y to lease 10,000 square feet of office space for a
period of 10 years. The annual lease payments are INR 100,000 in the first year, increasing by 5 percent each
year thereafter, payable in arrears. The economic life of office space is 40 years. The lease term is not for a
major part of the remaining economic life of the office space (40 years), and the present value of the lease
payments is not substantially all of the fair value of the office space. Furthermore, the title does not transfer to
Entity X as a consequence of the lease and the lease does not contain an option for Entity X to purchase the
office space. Besides, the asset is not specialised such that it clearly has an alternative use to Entity Y at the
end of the lease term. Thus, on a holistic evaluation of the terms of the lease, Entity Y determines that it does
not transfer substantially all the risks and rewards incidental to ownership of an underlying asset. Accordingly,
the lease is classified by Entity Y as an operating lease.
At the beginning of Year 6, Entity X and Entity Y agree to amend the original lease for the remaining 5 years to
include an additional 10,000 square feet of office space in the same building for an additional annual fixed
payment of INR 150,000. The modified lease continues to be classified as an operating lease.
How would Entity Y account for the modification in the lease contract?
Ans.
Land and Building Lease
CB 32. Entity X has entered into lease agreements to lease several items of office equipment. The items of office On 1
April 2017, Jupiter ltd began to lease a property on a 20-year lease. Jupiter ltd paid a lease premium of `
30,00,000 on 1 April 2017. The terms of the lease required Jupiter ltd to make annual payments of ` 500,000
in arrears, the first of which was made on 31 March 2018.
On 1 April 2017 the fair values of the leasehold interests in the leased property were as follows:
– Land ` 30,00,000 – Buildings ` 45,00,000

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A Book on Financial Reporting

option reasonably certain. Will your answer be different in this case?

line basis over the lease term or another systematic basis

requires Supplier ABC to repair or replace the rolling stock.

Whether there is an identified asset?

Yes, the said rolling stock is an identified asset.

because Supplier ABC must use it to fulfil the contract.

SM 3. Asset implicitly specified in a contract

Whether there is an identified asset?

Yes, the said car is an identified asset.

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be made available to Customer XYZ.

SM 4. Substantive Substitution Rights

server without the customer’s consent throughout the period of use.

substitution right affected the pricing of the arrangement.

considered as an identified asset.

SM 5. Identified Asset – Physically Distinct):

ABC does not have a substantive substitution right.

Whether there is an identified asset?

SM 6. Identified Asset – Not Physically Distinct

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95% of the pipeline’s capacity throughout the term of the arrangement.

Whether there is an identified asset?

capacity throughout the term of the arrangement.

Whether there is an identified asset?

Yes, the capacity portion of the pipeline is an identified asset.

No, the capacity portion of the pipeline is NOT an identified asset.

SM 7. Right to use for a portion of the term of contract

contract contains a lease for the specified period of term.

SM 8. Right to obtain substantially all of the economic benefits

15-year period because it obtains:

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not considered in this assessment.

SM 9. Right to direct the use of an asset

it breaks down). Under the contract:

protect its interest in the asset.

the vehicle is used for.

SM 10. Right to direct the use of an asset

SM 11. Right to direct the use of an asset

the ship, and is responsible for safe passage.

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SM 12. Identifying and separating lease components

many lease and non-lease components are there?

one lease component.

SM 13. Identifying different components in the contract

HVAC system and office furniture each has a life of 15 years.

What are the units of account in the lease?

furniture, and the maintenance agreement.

a group of distinct assets for which Entity L directs the use.

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SM 14. Activities which are not components of a lease contract

the consideration would be allocated?

SM 15. Allocating contract consideration to lease and non-lease components – Lessees

fixed prices for the lease and non-lease component:

observable information, of the lease and non-lease components, as follows: