Lessor

Classification of leases

A lessor shall classify each of its leases as either an operating lease or a finance lease. A lease is
classified as a finance lease if it transfers substantially all the risks and rewards incidental to
ownership of an underlying asset. A lease is classified as an operating lease if it does not transfer
substantially all the risks and rewards incidental to ownership of an underlying asset.

Whether a lease is a finance lease or an operating lease depends on the substance of the
transaction rather than the form of the contract. Examples of situations that individually or in
combination would normally lead to a lease being classified as a finance lease are:

a) the lease transfers ownership of the underlying asset to the lessee by the end of the lease term;

b) the lessee has the option to purchase the underlying asset at a price that is expected to be
sufficiently lower than the fair value at the date the option becomes exercisable for it to be
reasonably certain, at the inception date, that the option will be exercised;

c) the lease term is for the major part of the economic life of the underlying asset even if title is not
transferred;

d) at the inception date, the present value of the lease payments amounts to at least substantially all
of the fair value of the underlying asset; and

e) the underlying asset is of such a specialised nature that only the lessee can use it without major
modifications.

Indicators of situations that individually or in combination could also lead to a lease being classified
as a finance lease are:

a) if the lessee can cancel the lease, the lessor’s losses associated with the cancellation are borne by
the lessee

b) gains or losses from the fluctuation in the fair value of the residual accrue to the lessee (for
example, in the form of a rent rebate equaling most of the sales proceeds at the end of the lease);
and

c) the lessee has the ability to continue the lease for a secondary period at a rent that is substantially
lower than market rent.

The above indicators are not always conclusive. If it is clear from other features that the lease does
not transfer substantially all the risks and rewards incidental to ownership of an underlying asset, the
lease is classified as an operating lease. For example, this may be the case if ownership of the
underlying asset transfers at the end of the lease for a variable payment equal to its then fair value,
or if there are variable lease payments, as a result of which the lessor does not transfer substantially
all such risks and rewards.

Lease classification is made at the inception date and is reassessed only if there is a lease
modification. Changes in estimates (for example, changes in estimates of the economic life or of the
residual value of the underlying asset), or changes in circumstances (for example, default by the
lessee), do not give rise to a new classification of a lease for accounting purposes.

Finance lease and Operating lease

Recognition and measurement

Particulars Finance lease Operating lease

Balance Sheet Derecognise the underlying Continue to present the underlying asset.
impact asset.
Present lease receivables at an Add any initial direct costs incurred in
amount equal to the net connection with obtaining the lease to
investment in lease. the carrying amount of the underlying
asset.
Statement of profit Lessor shall recognise finance Lessor shall recognise lease payments
and loss income over the lease term, from operating leases as income on
based on a pattern reflecting a either a straight-line basis or another
constant periodic rate of systematic basis. The lessor shall apply
return on the lessor’s net another systematic basis if that basis is
investment in the lease. more representative of the pattern in
which benefit from the use of the
underlying asset is diminished.
Statement of profit Revenue being the fair value Recognise depreciation expense over the
and loss: of the underlying asset, or, if useful life of asset.
In case of lower, the present value of the
manufacturer or lease payments accruing to
dealer is lessor the lessor, discounted using a
market rate of interest.
The cost of sale being the cost,
or carrying amount if different,
of the underlying asset less
the present value of the
unguaranteed residual value.
Selling profit or loss in
accordance with its policy for
outright sales to which Ind AS
115 applies.
A lessor initially measures a finance lease receivable at the present value of the future lease
payments plus any unguaranteed residual value accruing to the lessor. The lessor discounts these
amounts using the interest rate implicit in the lease.

A lessor includes the following lease payments in the measurement of the finance lease receivable:

 fixed payments (including in-substance fixed payments), less lease incentives payable;

 variable payments that depend on an index or rate;

 residual value guarantees provided to the lessor at the guaranteed amount;

 the exercise price of purchase options if the lessee is reasonably certain to exercise; and

 termination penalties payable in accordance with the expected lease term

Manufacturer or dealer as lessor

At the commencement date, a manufacturer or dealer lessor recognises the following:

 The fair value of the underlying asset as revenue (or if lower, the present value of the lease
payments discounted using a market rate of interest).

 The cost (or carrying amount) of the asset less the present value of the unguaranteed residual
value, as cost of sale.

 The selling profit or loss in accordance with the policy for outright sales. A manufacturer or dealer
lessor recognises selling profit or loss on a finance lease at the commencement date, regardless of
whether the lessor transfers the underlying asset as described in Ind AS 115.

After lease commencement, a lessor accounts for a finance lease, as follows:

 Recognises finance income (in profit or loss) over the lease term in an amount that produces a
constant periodic rate of return on the remaining balance of the net investment in the lease (i.e.,
using the interest rate implicit in the lease). Income is recognised on the components of the net
investment in the lease, including: o Interest on the lease receivable; and o Interest via accretion of
the unguaranteed residual asset to its expected value at the end of the lease.

 Reduces the net investment in the lease for lease payments received (net of finance income
calculated above).

 Separately recognises income from variable lease payments that are not included in the net
investment in the lease (e.g., performance- or usage-based variable payments) in the period in which
that income is earned.

 Recognises any impairment of the net investment in the lease

Lease modification

A lessor accounts for a modification to a finance lease as a separate lease if both of the following
conditions exist:

 the modification increases the scope of the lease by adding the right to use one or more underlying
assets; and

 the consideration for the lease increases by an amount commensurate with the stand-alone price
for the increase in scope and any appropriate adjustments to that stand-alone price to reflect the
circumstances of the particular contract.

If the modification is not a separate lease, then the lessor accounts for a modification to a finance
lease as follows

 if the lease would have been classified as an operating lease if the modification had been in effect
at the inception date, then the lessor:

o accounts for the lease modification as a new lease from the effective date of the modification;
and

o measures the carrying amount of the underlying asset as the net investment in the original lease
immediately before the effective date of the lease modification; or otherwise

 otherwise, applies the requirements of Ind AS 109

Presentation

Lessor shall present underlying assets subject to operating leases in its balance sheet according to
the nature of the underlying asset.

Disclosures

The objective of the disclosures is for lessors to disclose information in the notes that, together with
the information provided in the balance sheet, statement of profit or loss and statement of cash
flows, gives a basis for users of financial statements to assess the effect that leases have on the
financial position, financial performance and cash flows of the lessor.

Type of disclosure Finance lease Operating lease

Quantitative disclosure Selling profit and loss Lease income relating to
variable lease payments that
do not depend on an index or
rate
Finance income on the net Other lease income
investment in the lease
Lease income relating to Detailed maturity analysis of
variable lease payments not the lease payments receivable
included in the net investment
in the lease
Significant changes in the If applicable, disclosures in
carrying amount of the net accordance with Ind AS 16
investment in the lease (separately from other assets),
Ind AS 36, Ind AS 38, Ind AS 40
and Ind AS 41
Qualitative disclosures Significant changes in the
carrying amount of the net
investment in the lease
A lessor shall disclose a
maturity analysis of the lease
payments receivable, showing
the undiscounted lease
payments to be received on an
annual basis for a minimum of
each of the first five years and
a total of the amounts for the
remaining years. A lessor shall
reconcile the undiscounted
lease payments to the net
investment in the lease. The
reconciliation shall identify the
unearned finance income
relating to the lease payments
receivable and any discounted
unguaranteed residual value.

Transition accounting: In the books of Lessor

Except for subleases and sale-and-leaseback transactions, a lessor does not make any adjustments
on transition:

Sales and leaseback transaction:

For a sale-and-leaseback transaction accounted for as a sale and finance lease in accordance with Ind
AS 17, the seller-lessee:

 accounts for the leaseback in the same way as for any finance lease that exists at the date of initial
application; and

 continues to amortise any gain on the sale over the lease term.

For a sale-and-leaseback transaction accounted for as a sale and operating lease in accordance with
Ind AS 17, the seller-lessee:

 accounts for the leaseback in the same way as for any other operating lease that exists at the date
of initial application; and

 adjusts the leaseback right-of-use asset for any deferred gains or losses that relate to off-market
terms recognised in the statement of financial position immediately before the date of initial
application.