Indas 116 - Questions & Solutions PDF

TOPIC- 30
INDAS 116
LEASES
Q1. 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?
Solution
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:
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.
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Q2. 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?
Solution
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.
Q3. (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.
Solution:
Yes, the said car is an identified asset.
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.
Q4. - 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
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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?
Solution
Scenario A:
The customer does not have the right to use an identified asset because, at the inception of
the contract, the 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 (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.
Q5. (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.
Solution:
Yes, the said five fibres are identified assets because they are physically distinct and explicitly
specified in the contract.
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Q6. (Identified Asset – Not Physically Distinct):
Scenario A
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.
Solution:
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.
Q7. (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 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 how the warehouse
will be used.
Which party has the right to control the use of the identified asset during the period of use?
Solution:
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
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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.
Q8. (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?
Solution:
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 from
use 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.
Q9. - 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 the
vehicle (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 when
or whether it is used and what it is used for. Customer X can also change these decisions
throughout the period of use.
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 Supplier Y prohibits certain uses of the vehicle (for e.g., moving it overseas) and
modifications 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?
Solution:
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 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.

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?
Solution:
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
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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?
Solution:
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.
Q12. - 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?
Solution:
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.
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Q13. - 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 Rs 10,000.
The contract contains fixed annual payments as follows: Rs 8,000 for rent, Rs 1,500 for
maintenance and Rs 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?
Solution:
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
Rs 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 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 Rs 50,000 will be allocated to the lease
component (equipment) and the non-lease component (maintenance).
Q14. - 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 Rs 80,000
Maintenance Rs 10,000
Total Rs 90,000
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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 Rs 85,000
Maintenance Rs 15,000
Total Rs 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?
Solution:
The stand-alone price for the lease component represents 85%
(i.e., Rs 85,000 / Rs 1,00,000) of total estimated stand-alone prices. The lessee allocates
the consideration in the contract (i.e., Rs 90,000), as follows:
Lease * Rs 76,500
Maintenance ** Rs 13,500
Total Rs 90,000
* Rs 90,000 x 85%
** Rs 90,000 x 15%
Q15. - 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:
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
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during a non-cancellable term of seven years. The lessor agrees to provide the same retail space
for each of the seven years. What is the lease term?
Solution:
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.
Q16. - 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?
Solution:
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.
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Q17. - 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?
Solution:
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-cancellable period by Company N and hence, Company N will
reassess the non-cancellable period to exclude the extension option of 5 years.
Q18. - 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 Rs 200,000. Per the terms of the lease agreement, annual fixed lease payments
comprise Rs 170,000 for rent and Rs 30,000 for real estate taxes.
What are the fixed lease payments for purposes of classifying the lease?
Solution:
The fixed lease payments are Rs 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 Rs 2,00,000 represent payments related to that single lease
component.
Q19. - 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?
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Solution:
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.
Q20. - In-substance fixed lease payment

Entity P enters into a five-year lease for office space with Entity Q. The initial base rent is
Rs 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?
Solution:
In the given case, the lease payments for purposes of classifying the lease are the fixed monthly
payments of Rs 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.
Q21. - 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 Rs 1,000 per hour of use. The annual minimum
payment is Rs 10,00,000. The expected usage per year is 1,500 hours.
Solution:
The lease contains in substance fixed payments of Rs 10,00,000 per year, which are included in
the initial 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.
Q22. - Variable lease payments that depend on an index or rate

An entity enters into a 10-year lease of property. The lease payment for the first year is Rs
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?
Solution:
At the lease commencement date, the lease payments are Rs 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.
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At the end of year two, when the lease payments change, the entity updates the remaining
eight lease payments to Rs 1,080 per year (i.e., Rs 1,000 / 100 x 108).
Q23. - 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 Rs
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?
Solution:
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 & Customer ABC) & 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.
Q24. - Variable lease payments

Entity A enters into a five-year lease of an office building. The lease payments are Rs 5,00,000
per year and the contract includes an additional water charge calculated as Rs 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
Solution:
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
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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.
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.
Q25. - Residual value guarantee included in lease payments

An entity (a lessee) enters into a lease and guarantees that the lessor will realise Rs 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 Rs 8,000 at the end of the lease. Whether the lessee should
include the said payment of Rs 8,000 as a lease payment?
Solution:
The lessee should include the amount of Rs 8,000 as a lease payment because it is expected
that it will owe the same to the lessor under the residual value guarantee.
Q26. - 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 Rs 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?
Solution:
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
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3 1,04,040 0.907 94,364
4 1,06,121 0.864 91,689
5 1,08,243 0.823 89,084
6 1,10,408 0.784 86,560
7 1,12,616 0.746 84,012
8 1,14,869 0.711 81,672
9 1,17,166 0.677 79,321
10 1,19,509 0.645 77,083
8,80,887
Therefore, the lease liability is initially measured at Rs 8,80,887
Q27. 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 Rs 10,000 upon execution
of the lease.
 ♦ Entity Z will pay Entity Y Rs 50,000 cash incentive to enter into the lease payable upon
lease execution.
Entity Y incurred Rs 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 the rate implicit in the lease could not be readily
determined; the initial lease liability is Rs 850,000.
How would Lessee Company measure and record this lease?
Solution:
Entity Y would calculate the right-of-use asset as follows: Rs
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)
Initial direct cost 1,000
Initial measurement of right-of-use asset 8,11,000
Q28. - 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
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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?
Solution:
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.
Q29. - 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:
Rs 20,000 in year one
Rs 30,000 in year two
Rs 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?
Solution:
At the commencement date, Entity ABC would initially recognise ROU Asset and the
corresponding Lease Liability of Rs 77,364 which is calculated as follows:
Year Payments (Cash Discounting Factor Discounted Cash flows /
flows) @12% Present Value
1 20,000 0.8929 17,858
2 30,000 0.7972 23,916
Then, the next step would be to prepare a schedule for Lease Liability and ROU Asset as
follows:
Lease Liability
354
Year Opening balance Interest Expense Payments Closing balance
1 77,364 9,284 (20,000) 66,648
2 66,648 7,998 (30,000) 44,646
3 44,646 5,354* (50,000) -
*Difference of Rs 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
3 25,788 (25,788) -
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 Expenses Dr. 9,284
To leases Liability 9,284
To record interest expenses and accrete the lease liability using the effective
interest method (Rs 77,364 X12%)
Depreciation Expense Dr. 25,788
To ROU Asset 25,788
To record interest expense and accrete the lease liability using the
straight line method (Rs 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:

Interest Expense 9,284 7,998 5,354
355
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) -
Q30. - Subsequent measurement using cost model

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 Rs 50 Lacs. Company EFG has an option to purchase the property
at the end of the lease term for Rs 30 lacs. The first annual payment is Rs 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 Rs 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?
Solution:
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) Rs 37,39,648

PV of purchase option at end of lease term (W.N. 2) Rs 12,60,000
Total lease liability Rs 49,99,648 or Rs
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. Rs 50,00,000
To Lease Liability Rs 50,00,000
To record ROU asset and lease liability at the commencement date.
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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 Rs 1,25,000 (Rs 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 Interest Interest Lease
paid at the paid expense Liability
beginning of (end of the
the year year
a b= a-c c = (d of d = [(e of e = (e of
pvs. pvs. year- a) pvs. Year + d
Year) x 9.04%] – a)
Commence 50,00,000
ment
Year 1 5,00,000 5,00,000 - 4,06,800 49,06,800
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
Year 4 5,46,364 1,41,693 4,04,671 3,91,862 47,26,618
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
Year 7 5,97,026 2,38,984 3,58,042 3,36,438 40,58,094
Year 8 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
Year 10 6,52,387 3,70,246 2,82,141 2,49,213* 30,00,000
Year 10 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.
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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
Year 5 5,62,754 0.71 3,99,555
Year 6 5,79,637 0.65 3,76,764
Year 7 5,97,026 0.59 3,52,245
Year 8 6,14,937 0.55 3,38,215
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 Present value Present value of
purchase option factor @ 9.04% purchase option
(A) (B) (A*B=C)
Year 10 30,00,000 0.42 12,60,000
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.
Q31. 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 Rs 100,000 and Rs 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.
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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 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?
Solution:
Since Entity W is now reasonably certain that it will exercise its renewal option, it is required
to remeasure the lease in the first quarter of 2020.
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 Rs 1,81,840 (Refer note 1)
remeasurement
Lease liability immediately before the Rs 1,85,947 (Refer note 1)
remeasurement
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 Rs 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
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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 Present value Present value of lease
beginning Payment (A) factor @ 5% (B) payments (AxB=C)
1 1,00,000 1.000 1,00,000
2 1,00,000 0.952 95,200
3 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 ROU
Liability 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
Q32. - 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?
360
Solution:
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.
Q33. - 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 Rs 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., Rs 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.
Solution:
At the effective date of the modification (at the beginning of Year 7), Lessee remeasures the
lease liability based on:
(a) An eight-year remaining lease term
(b) Annual payments of Rs 1,00,000 and
(c) Lessee’s incremental borrowing rate of 7% p.a.
The modified lease liability equals Rs 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
Rs 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., Rs 2,50,745) (W.N. 4) as an adjustment to the ROU Asset.
361
Working Notes:
1. Calculation of modified lease liability:
(A) @ 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 Present value factor Present value of lease
Payment (A) @ 6% (B) 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
3. Calculation of Lease liability immediately before modification date:

Year Opening lease Interest @ 6% Lease Closing liability
liability (A) (B) = [A x 6%] payments (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
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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 Rs 2,50,745 on the date of modification.
Q34. - Modification that decreases the scope of the lease

payments are Rs 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 Rs
30,000. Lessee’s incremental borrowing rate at the beginning of Year 6 is 5% p.a.
Solution:
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=ax d = a-b e f g
6% +c
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
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*(refer note 1)
(a) a five-year remaining lease term,
(b) annual payments of Rs 30,000 and
Payment(A) @ 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 (Rs 1,83,975) is Rs 91,987.50.

50% of the pre-modification lease liability (Rs 2,10,546) is Rs 1,05,273.
Consequently, Lessee reduces the carrying amount of the ROU Asset by Rs 91,987.50 and the
carrying amount of the lease liability by Rs 1,05,273. Lessee recognises the difference between
the decrease in the lease liability and the decrease in the ROU Asset (Rs 1,05,273 – Rs
91,987.50 = Rs 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 Rs 1,05,273 and the
modified lease liability of Rs 1,29,900 (which equals Rs 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:
Payment(A) @ 6% (B) payments (A x B = C)
1 50,000 0.943 47,150
2 50,000 0.890 44,500
364
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
Q35. - Modification that is a change in consideration only

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 Rs 1,00,000 per year to Rs 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.
Solution:
In the given case, Lessee calculates the ROU asset and the lease liabilities before modification
as follows:
Year Opening lease Interest @ 6% Lease Closing liability
liability (A) (B) = [A x 6%] payments (D) = [A+B-C]
(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 Rs 95,000, and
365
Year Lease Present value @ Present value of lease
Payments (A) 7% (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 (Rs
3,89,500) and the lease liability immediately before the modification (Rs 4,21,090) of Rs 31,590
as an adjustment to the ROU Asset.
Working Note:
Calculation of Initial value of ROU asset and lease liability:
Payment (A) factor @ 6% (B) 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
Q36. - Modification that both increases and decreases the scope of the lease
payments are Rs 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:
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(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 Rs 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.
Solution:
The pre-modification ROU Asset and the pre-modification lease liability in relation to the lease
are as follows:
Lease ROU Asset
Year liability
Opening Interest Lease Closing Opening Depreciatio Closing
balance expense payment balance balance n charge balance
@ 6%
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.
lease liability on the basis of:
(a) A three-year remaining lease term (i.e. till 8th year),
(b) Annual payments of Rs 150,000 and
Year Lease Payments Present value @ Present value of lease
(A) 7% (B) payments (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
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The modified liability equals Rs 3,93,600, of which (a) Rs 1,31,200 relates to the increase of
Rs 50,000 in the annual lease payments from Year 6 to Year 8 and (refer note 1) (b) Rs
2,62,400 relates to the remaining three annual lease payments of Rs 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 Rs 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 Rs
2,20,770 [i.e., Rs (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 Rs 4,21,090. The remaining lease liability for the original 2,000 square metres
of office space is Rs 2,67,300 (i.e., present value of three annual lease payments of Rs 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 Rs 1,47,180 (Rs 3,67,950
– Rs 2,20,770), and the carrying amount of the lease liability by Rs 1,53,790 (Rs 4,21,090 –
Rs 2,67,300). Lessee recognises the difference between the decrease in the lease liability and
the decrease in the ROU Asset (Rs 1,53,790 – Rs 1,47,180 = Ra 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 Rs 4,900 (Rs 2,67,300 – Rs 2,62,400*), as an adjustment to the ROU
Asset.
*(Refer note 3)
Lease Liability Dr. 4,900
To ROU Asset 4,900
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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 Rs 1,31,200 (i.e., present value of three annual lease payments of
Rs 50,000, discounted at the revised interest rate of 7% p.a.) as an adjustment to the ROU
Asset.
To Lease Liability 1,31,200
The modified ROU Asset and the modified lease liability in relation to the modified lease are
as follows:
Lease ROU Asset
Year liability
Opening Interest Lease Closing Opening Depreciation Closing
balance expense payment balance balance charge balance
@ 7%
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:
Payments (A) @7% (B) 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 Present value factor Present value of lease
(A) @ 6% (B) 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
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3. Calculation of remaining lease liability for the original contract of 2000 square
meters at revised discount rate:
Year Lease Payments Present value Present value of lease
(A) factor @ 7% (B) payments (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 2,62,400
4. Calculation of Initial value of ROU asset and lease liability:

Year Lease Payment Present value Present value of lease
(A) factor @ 6% (B) 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
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 2,20,770
of office space after decrease 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
Q37. - 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 Rs 15,000, payable at the end of the year
 Lessor expects the residual value of the equipment to be Rs 50,000 at the end of the 10-
year lease term
 Lessee provides a residual value guarantee that protects Lessor from the first Rs 30,000 of
loss for a sale at a price below the estimated residual value at the end of the lease term
(i.e., Rs 50,000)
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 The equipment has an estimated remaining economic life of 15 years, a carrying amount of
Rs 1,00,000 and a fair value of Rs 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?
Solution:
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 Rs 1,11,000(a)
Cost of goods sold Rs 92,340(b)
Revenue Rs 1,03,340(c)
Property held for lease Rs 1,00,000(d)
To record the net investment in the finance lease and derecognise the underlying asset.
(a) The net investment in the lease consists of:
(1) the present value of 10 annual payments of Rs 15,000 plus the guaranteed residual
value of Rs 30,000, both discounted at the interest rate implicit in the lease,
which equals Rs 1,03,340 (i.e., the lease payment) (Refer note 1) AND
(2) The present value of unguaranteed residual asset of Rs 20,000, which equals Rs
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 Rs 1,00,000 (less) the
present value of the unguaranteed residual asset of Rs 7,660.
(c) Revenue equals the lease receivable.
(d) The carrying amount of the underlying asset.
At lease commencement, Lessor recognises selling profit of Rs 11,000 which is calculated as =

lease payment of Rs 1,03,340 – [carrying amount of the asset (Rs 1,00,000) – net of any
unguaranteed residual asset (Rs 7,660) i.e. which equals Rs 92,340]
Cash Rs 15,000(e)
Net investment in the lease Rs 3,813(f)
Interest income Rs 11,187(g)
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(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 Rs 15,000,
net of interest income of Rs 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 Net investment at the
Payment Income (h) end of 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
10 15,000 5,953 50,000(i)
(h) 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 Rs 1,11,000 (initial net
investment) x 10.078%.
(i) The estimated residual value of the equipment at the end of the lease term.
Working Notes:
1. Calculation of net investment in lease:
(A) @ 10.078% (B) 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
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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

(A) @ 10.078% (B) payments (A x B = C)
10 20,000 0.383 7,660
Q38. - 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?
Solution:
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.
Q39. - 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:
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?
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Solution:
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.
Q40. - Intermediate Lessor – Where the sublease is classified as an ‘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?
Solution:
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
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- 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).
Q41. - Sale and leaseback transaction

An entity (Seller-lessee) sells a building to another entity (Buyer-lessor) for cash of Rs
30,00,000. Immediately before the transaction, the building is carried at a cost of Rs 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 Rs 2,00,000 payable at the end of each
year.
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 Rs 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?
Solution:
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 Rs 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
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Next step would be to calculate the present value of the annual payments which amounts to
Rs 14,94,000 (calculated considering 20 payments of Rs 2,00,000 each, discounted at 12% p.a.)
of which Rs 3,00,000 relates to the additional financing (as calculated above) and balance Rs
11,94,000 relates to the lease — corresponding to 20 annual payments of Rs 40,164 and Rs
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) (A) 27,00,000
Carrying Amount (B) 15,00,000
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) 5,30,667
= [(D / A) x C]
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
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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 Rs 40,160 discounted 3,00,000
@ 12% p.a.) (approx.) Dr.
To Cash 30,00,000
After the commencement date, Buyer-lessor accounts for the lease by treating Rs 1,59,840 of
the annual payments of Rs 2,00,000 as lease payments. The remaining Rs 40,160 of annual
payments received from Seller-lessee are accounted for as:
(a) payments received to settle the financial asset of Rs 3,00,000 AND
(b) Interest revenue.
Q42. - Transition Approaches

A retailer (lessee) entered into 3-year lease of retail space beginning at 1 April 2017 with three
annual lease payments of Rs 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
Solution:
Full Retrospective Approach:
Under the full retrospective approach, the lease liability and the ROU asset are measured on
the commencement date (i.e., 1 April 2017 in this case) using the incremental borrowing rate
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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:
Year Payments (Cash Present Value Discounted Cash flows /
flows) Factor @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 Payments Closing
@ 12%
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 -
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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 lessee would record the ROU
asset and 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).
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 record interest expense & accrete the lease liability using the interest method.


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

Balance @ 10% Balance
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)
commencement:
Date ROU Asset Lease Interest Depreciation Retained
Liability 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)
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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

To record interest expense and accrete the lease liability using the interest
method.
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 Discounted Cash flows /
(Cash flows) @10% 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

@ 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
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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
hence, no impact on retained earnings as on the transition date. Let us first calculate the
Lease Liability and ROU Asset as follows:
Year Payments (Cash Discounting Discounted Cash flows
flows) Factor @ 10% / Present Value
31 Mar 2020 2,00,000 0.9091 1,81,820
2,00,000 1,81,820

31 Mar 2020 1,81,820 18,182 (2,00,000) -
ROU Asset Schedule:

31 Mar 2020 1,81,820 (1,81,820) -
commencement:
Date ROU Asset Lease Interest Depreciation Retained
Liability Expense Expense Earnings
01 Apr 2019 1,81,820 1,81,820 - - -
31 Mar 2020 - - 18,182 1,81,820 -
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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 record interest expense & accrete the lease liability using the interest method.
To Cash 2,00,000
A summary of the lease contract’s accounting (assuming there are no changes due to
reassessments) is, as follows:
Particulars Full Modified Modified
Retrospective Retrospective 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
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Q43.
On 1 April 2017, Jupiter ltd began to lease a property on a 20-year lease. Jupiter ltd paid a
lease premium of Rs30,00,000 (One Time payment) on 1 April 2017. The terms of the lease
required Jupiter ltd to make annual payments of Rs 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 Rs 30,00,000.
– Buildings Rs 45,00,000.
There is no opportunity to extend the lease term beyond 31 March 2037. On 1 April 2017, the
estimated useful economic life of the buildings was 20 years.
The annual rate of interest implicit in finance leases can be taken to be 9·2%. The present
value of 20 payments of Rs 1 in arrears at a discount rate of 9·2% is Rs 9.
Required:
Explain the accounting treatment for the above property lease and produce appropriate extracts
from the financial statements of Jupiter ltd for the year ended 31 March 2018.
Solution:
1) The land lease is an operating lease because land has an indefinite useful economic life
and the lease term is 20 years.
The lease premium and annual rentals are apportioned 40% (3/7·5) to the land element.
Therefore the premium for the land element is Rs 12,00,000 (Rs 30,00,000 X 40%) and the
annual rentals for the land element Rs 200,000 (Rs 500,000 X 40%). This makes the total
lease payments Rs 52,00,000 (Rs 12,00,000 + 20 X Rs 200,000).
The rental expense for the current period is Rs 2,60,000 (Rs 52,00,000 X 1/20).
The amount paid in the current period re: the land element is Rs 14,00,000 (Rs 12,00,000 + Rs
200,000). Therefore there is a prepayment of Rs 1,140,000 (Rs 14,00,000 – Rs 2,60,000) at the
year end.
In the next 19 periods, the rental expense will be Rs 260,000 and the rental payment will be
Rs 200,000. Therefore Rs 60,000 of the rental prepayment will reverse in each period. This
means that Rs 60,000 of the prepayment will be a current asset, and the balance a non-
current asset.
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2) The buildings element of the lease will be a finance lease because the lease term is for
substantially all of the useful life of the buildings.
The premium apportioned to the buildings element is Rs 18,00,000 (Rs 30,00,000 X 60%) and
the annual rental apportioned to the buildings is Rs 300,000 (Rs 500,000 X 60%).
The initial carrying value of the leased asset in PPE is Rs 45,00,000 (Rs 18,00,000 + Rs 300,000
X 9).
Therefore the annual depreciation charge is Rs 2,25,000 (Rs 45,00,000 X 1/20) and the closing
PPE (Rs 45,00,000 – Rs 2,25,000).
Q44.
B&P Ltd. availed a lease from N&L Ltd. The conditions of the lease terms are as under:
(a) Lease period is 3 years, in the beginning of the year 20X1, for equipment costing Rs
10,00,000 and has an expected useful life of 5 years.
(b) The Fair market value is also Rs 10,00,000.
(c) The property reverts back to the lessor on termination of the lease.
(d) The unguaranteed residual value is estimated at Rs 1,00,000 at the end of the year 20X1.
(e) 3 equal annual payments are made at the end of each year.
(f) Consider IRR = 10%
(g) The present value of Rs. 1 due at the end of 3rd year at 10% rate of interest is Rs. 0.7513.
(h) The present value of annuity of Rs. 1 due at the end of 3rd at 10% IRR is Rs 2.4868.
State whether the lease constitute finance lease for Lessor.
Solution:
Particulars Amount (Rs.)
Cost of equipment 10,00,000
Unguaranteed residual value 1,00,000
Present value of residual value after third year @ 10% (1,00,000 × 75,130
0.7513)
Fair value to be recovered from lease payments (Rs 10,00,000 – Rs 9,24,870
75,130)
Present value of annuity for three years 2.4868
Annual lease payment = ₹ 9,24,870/2.4868 3,71,912
The present value of lease payment i.e., Rs 9,24,870 equals 92.48% of the fair market value,
i.e., Rs 10,00,000. As the present value of minimum lease payments substantially covers the
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initial fair value of the leased asset and lease term covers the major part of the life of asset,
it constitutes a finance lease.
Particulars Amount (Rs.)

Total lease payments (Rs 3,71,912 × 3) 11,15,736
Add: Unguaranteed residual value 1,00,000
Gross investment in the lease 12,15,736
Less: Net Investment, i.e., Present value of gross investment (lease
payments and residual value) (₹ 75,130 + Rs 9,24,870) 10,00,000
Q45.
On April 1, 2012 ABC Ltd. leases equipment for 4 years to XYZ Ltd. The Cost of the equipment
is Rs. 15,00,000 and has a useful life of 10 years (assume straight line method of depreciation).
The lease payments to be made are as follows:
Year Amount
1 1,00,000
2 1,50,000
3 1,75,000
4 2,00,000
The lease is classified as an operating lease. How would this lease be accounted for in the
books of accounts of the Lessee and the Lessor?
(Hint: 156250/- LEASE RENT to be recognised)
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What are the factors to consider in determining whether a lease term is reasonably certain to be extended?

What are the factors to consider in determining whether a lease term is reasonably certain to be extended?

What are the factors to consider in determining whether an asset is implicitly specified in a contract?

What are the factors to consider in determining whether an asset is implicitly specified in a contract?

TOPIC- 30

Q1. Short-term lease

Q3. (Asset implicitly specified in a contract):

Q4. - Substantive Substitution Rights

Q5. (Identified Asset – Physically Distinct):

Q7. (Right to use for a portion of the term of contract):

Q8. (Right to obtain substantially all of the economic benefits):

Q9. - Right to direct the use of an asset

Q10. - Right to direct the use of an asset

Q11. - Right to direct the use of an asset

Q12. - Identifying different components in the contract

Q14. - Allocating contract consideration to lease and non-lease components – Lessees

Q15. - Determining the lease term

Q16. - Re-assessment of exercise of lease extension option

Q18. - Determining the fixed payments

Q19. - In substance fixed lease payments

Q20. - In-substance fixed lease payment

Q21. - In substance fixed lease payments

Q22. - Variable lease payments that depend on an index or rate

Q23. - Variable lease payments that do not depend on an index or rate

Q24. - Variable lease payments

Q25. - Residual value guarantee included in lease payments

Q26. - Initial measurement of lease liability

Therefore, the lease liability is initially measured at Rs 8,80,887

Q27. Measuring right-of-use asset

Q28. - Dismantling costs to be included in initial measurement of ROU Asset

Q29. - Lessee Accounting

*Difference of Rs 4 is due to approximation.

The following journal entries would be recorded in the first year:

Lease Expense Recognised:

Q30. - Subsequent measurement using cost model

PV of lease payments, less lease incentive (W.N. 1) Rs 37,39,648

*(5,00,000 + increased by 3% - lease incentive paid amounting to 2,00,000)

2. Calculating PV of purchase option at end of lease term:

Q31. Remeasurement of a lease with variable lease payments

2. Calculation of Lease Liability and ROU asset at each year end

Q32. - Modification that is a separate lease

2. Calculation of Lease liability as at commencement date:

3. Calculation of Lease liability immediately before modification date:

4. Adjustment to ROU asset:

The ROU asset will be increased by Rs 2,50,745 on the date of modification.

Q34. - Modification that decreases the scope of the lease

50% of the pre-modification ROU Asset (Rs 1,83,975) is Rs 91,987.50.

Q35. - Modification that is a change in consideration only

Decrease in the lease term:

4. Calculation of Initial value of ROU asset and lease liability:

Q37. - Lessor accounting for a finance lease - dealer-lessor case

At lease commencement, Lessor accounts for the finance lease, as follows:

At lease commencement, Lessor recognises selling profit of Rs 11,000 which is calculated as =

2. Calculation of present value of unguaranteed residual asset

Q38. - Classification of a sublease in case of an Intermediate Lessor

Q39. - Intermediate Lessor – Where the sublease is classified as a ‘Finance Lease’

Q40. - Intermediate Lessor – Where the sublease is classified as an ‘Operating Lease’

During the term of the sublease, the intermediate lessor:

Q41. - Sale and leaseback transaction