RECENT AMENDMENT IN IND

AS 116 – LEASES
Amendment dated 9th September, 2024 and effective from FY 2024-25.

Leaseback Agreements
• In case of lease-back agreements, where a seller-lessee transfers an asset to another entity (buyer-
lessor) and leases that asset back from the buyer-lessor, he shall record the lease liability and the
right-of-use asset accordingly [Newly added Para 102A]:
o For lease liability:
▪ Increasing the carrying amount to reflect interest on the lease liability;
▪ reducing the carrying amount to reflect the lease payments made;
▪ determine ‘lease payments’ or ‘revised lease payments’ in a way that would
not recognise any amount of the gain or loss that relates to the right of use
retained by the seller-lessee; and
▪ remeasuring the carrying amount in accordance with Ind AS 116.
o For leased back asset:
▪ Record at cost, less any accumulated depreciation and any accumulated
impairment losses; and
▪ adjusted for any remeasurement the lease liability in accordance with Ind AS
116.

Consider the following examples for clarification:

(A)

An entity (Seller-lessee) sells a building to another entity (Buyer-lessor) for cash of ₹2,000,000.
Immediately before the transaction, the building is carried at a cost of ₹ 1,000,000. At the same time,
Seller-lessee enters into a contract with Buyer-lessor for the right to use the building for 18 years,
with annual payments of ₹120,000 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 of Ind
AS 115, Revenue from Contracts with Customers, to be accounted for as a sale of the building.
Accordingly, Seller-lessee and Buyer-lessor account for the transaction as a sale and leaseback.

The fair value of the building at the date of sale is ₹1,800,000. Because 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. Applying paragraph 101(b) of Ind AS 116, the amount of the excess sale
price of ₹200,000 (₹2,000,000 – ₹1,800,000) is recognised as additional financing provided by Buyer-
lessor to Seller-lessee.

The interest rate implicit in the lease is 4.5 per cent per annum, which is readily determinable by
Seller- lessee. The present value of the annual payments (18 payments of ₹120,000, discounted at 4.5
per cent per annum) is ₹1,459,200, of which ₹200,000 relates to the additional financing and
₹1,259,200 relates to the lease—corresponding to 18 annual payments of ₹16,447 and ₹103,553,
respectively. Buyer-lessor classifies the lease of the building as an operating lease.
At the commencement date,

Seller-lessee accounts for the transaction as follows:

Cash 20,00,000 dr.

Right-of-use asset 6,99,555 dr.
To Building 10,00,000
To Lease Liability 12,59,200
To Financial Liability 2,00,000
To Gain on rights transferred 2,40,355

Right to use - ₹1,000,000 (the carrying amount of the building) × ₹1,259,200 (the discounted lease
payments for the 18-year right-of-use asset) ÷ ₹1,800,000 (the fair value of the building) equals to
₹6,99,555.

Seller-lessee recognises only the amount of the gain that relates to the rights transferred to
Buyerlessor of ₹240,355 calculated as follows. The gain on sale of the building amounts to ₹800,000
(₹1,800,000 –₹1,000,000), of which:

(a) ₹559,645 (₹800,000 × ₹1,259,200 ÷ ₹1,800,000) relates to the right to use the building
retained by Seller-lessee; and
(b) ₹240,355 (₹800,000 × (₹1,800,000 – ₹1,259,200) ÷ ₹1,800,000) relates to the rights
transferred to Buyer-lessor.

Buyer-lessor accounts for the transaction as follows:

Building ₹18,00,000
Financial Asset ₹2,00,000
To Cash ₹20,00,000

After the commencement date, Buyer-lessor accounts for the lease by treating ₹103,553 of the annual
payments of ₹120,000 as lease payments. The remaining ₹16,447 of annual payments received from
Seller- lessee are accounted for as (a) payments received to settle the financial asset of ₹200,000 and
(b) interest revenue.

(B)

An entity (Seller-lessee) sells a building to another entity (Buyer-lessor) for cash of ₹1,800,000 (the
fair value of the building at the date of sale). Immediately before the transaction, the building is
carried at a cost of ₹1,000,000. At the same time, Seller-lessee enters into a contract with Buyer-
lessor for the right to use the building for five years. Lease payments—payable annually—comprise
fixed payments and variable payments that do not depend on an index or rate.

The terms and conditions of the transaction are such that the transfer of the building by Seller-lessee
satisfies the requirements of Ind AS 115, Revenue from Contracts with Customers to be accounted for
as a sale of the building. Accordingly, Seller-lessee accounts for the transaction as a sale and
leaseback.

The interest rate implicit in the lease cannot be readily determined. Seller-lessee’s incremental
borrowing rate is 3% per annum. Applying paragraph 100(a) of Ind AS 116, Seller-lessee determines the
proportion of the building transferred to Buyer-lessor that relates to the right of use it retains as 25%.
Consequently, at the commencement date,
Seller-lessee accounts for the transaction as follows:

Cash 18,00,000
Right-of-use asset (₹1,000,000 × 25%) 2,50,000
Building 10,00,000
Lease Liability 4,50,000
Gain on rights transferred ((₹1,800,000 – ₹1,000,000) × 75%) 6,00,000

In measuring the lease liability, depending on the circumstances (including the method Seller-lessee
used—applying paragraph 100(a) of Ind AS 116—for determining the measurement of the right-of-use
asset and the gain recognised on the transaction at the commencement date), either Approach 1 or
Approach 2 could meet the requirements in paragraph 102A.

Approach 1—Expected lease payments at the commencement date

Applying paragraph 102A of Ind AS 116, Seller-lessee determines ‘lease payments’ to reflect the
expected lease payments at the commencement date that, when discounted using its incremental
borrowing rate, result in the carrying amount of the lease liability at that date of ₹450,000. The lease
liability and the right-of-use asset arising from the leaseback are:

In applying paragraph 102A and paragraph 38(b) of Ind AS 116, Seller-lessee recognises in profit or loss
the difference between the payments made for the lease and the lease payments that reduce the
carrying amount of the lease liability. For example, if Seller-lessee pays ₹99,321 for the use of the
building in Year 2, it recognises ₹1,197 (₹99,321 – ₹98,124) in profit or loss.

Approach 2—Equal lease payments over the lease term

Applying paragraph 102A of Ind AS 116, Seller-lessee determines ‘lease payments’ to reflect equal
periodic payments over the lease term that, when discounted using its incremental borrowing rate,
result in the carrying amount of the lease liability at the commencement date of ₹450,000. The lease
liability and the right-of-use asset arising from the leaseback are:
In applying paragraph 102A and paragraph 38(b) of Ind AS 116, Seller-lessee recognises in profit or loss
the difference between the payments made for the lease and the lease payments that reduce the
carrying amount of the lease liability. For example, if Seller-lessee pays ₹99,321 for the use of the
building in Year 2, it recognises ₹1,061 (₹99,321 – ₹98,260) in profit or loss.