Ind AS 116 Leases Explained

Objective & scope

Bring (almost) every lease onto the balance sheet

Ind AS 116 requires lessees to recognise a right-of-use (ROU) asset and a corresponding lease liability for nearly all leases — removing the old operating-vs-finance distinction for lessees. Short-term leases (12 months or less) and low-value asset leases remain optional exemptions.

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Key recognition & measurement points

Initial measurement of the lease liability at the present value of unpaid lease payments, discounted at the rate implicit in the lease or the lessee's incremental borrowing rate.
The ROU asset is initially measured at the lease liability amount, plus initial direct costs, prepaid rent, and restoration obligations, less incentives received.
Subsequent measurement: the ROU asset is depreciated (usually straight-line); the liability is unwound using the effective interest method.
Lease modifications, rent concessions and reassessments (e.g. a change in lease term) require remeasuring the liability and adjusting the ROU asset.

What must be disclosed

A maturity analysis of lease liabilities, split between current and non-current.
Depreciation charge on ROU assets by class of underlying asset, and interest expense on lease liabilities.
Short-term and low-value lease expense, and variable lease payments not included in the liability.
Additions to ROU assets during the period, and any impairment recognised.

Where teams get it wrong

Common pitfalls

The most common errors: using the wrong discount rate (applying a borrowing rate that doesn't reflect the lease term and security), missing embedded leases inside service contracts, and forgetting to reassess the liability when a renewal option becomes reasonably certain or a rent escalation clause kicks in mid-term.

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