ICAI has drawn attention towards whole new Ind AS 116 – Leases and notified the same which will be applicable from 1st April 2019 which will replace the existing Accounting standard 19 on Leases. Here is everything you need to know about the new Leasing Standards by the Institute of Chartered Accountants of India (ICAI) by FinanceShed.
The new standard will require lessees to recognize leases on their balance sheets. Lessees will use a single accounting model for all leases, with limited exemptions. It is important to decide when a customer has the right to direct the use of an identified asset and also to take judgment for arrangements that include significant services. Ind AS provides new criteria for determining whether an arrangement meets the definition of a lease.
The decision to lease or own an asset has often been assisted by the available financing options, the tax treatment, and the accounting implications. This can be an off-balance sheet treatment of the underlying asset and associated debt. Under the existing rules, lessees account for leases either as operating leases or as finance leases, depending on complex rules and tests.
Applicability Of Ind AS 116
According to the notification, this standard applies to each and every lease transaction which also includes leases of right-of-use and sublease. This standard is applicable to nearly each and every lease transaction but excludes lease to explore or use mineral, oil and natural gas and such other non-regenerative resources. The standard is also not applicable to lease of biological assets that fall within the scope of Ind AS 41. The non-application continuous to lease of intellectual property which falls within the scope of Ind AS 115.
Also Read:- 7 Must Follow Tips On How To Get Out Of A Lease
The key changes in lessees accounting relate to the introduction of a single lease accounting model by the elimination of classification between operating and finance leases. Also, a single lease accounting model is used for recognition of gain/ loss for sale and lease-back transactions. ICAI always tries to ensure that Ind AS or Indian Accounting Standards framework remains acceptable at the global level and accepted as IFRS standards. The core change in the standard is that this model lessee the majority of leases will be recognized on the balance sheet by recognizing a lease liability with a corresponding right-of use asset.
The standard is constructed in such a way that it will have its effect on all the three components of financial statements that include Balance Sheet, statement of Profit and loss and Cash Flow Statement. The extent to which this standard will affect depends on industries and varies depending on financing and leasing structures in the said industry.
Leasing is considered to be one of the long-established forms of obtaining finance. The new standard on leases ushers in a substantial change in the accounting for operating leases by lessees and few improvements in the disclosure related aspects for lessors accounting. There are various low- value and short term leases that are exempted from the applicability criteria to provide substantial relief from operational complexities.
Ind AS 116 is expected to have a significant impact on various industries But the industry which is going to affect more is aviation where airlines mostly operate planes on lease. As the common practice here is the leasing of aircraft rather than purchasing one.