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Lease accounting is changing - An insight with sectoral impacts

Lease accounting is changing - An insight with sectoral

The publication captures the significant impact of the new standard on leases on various sectors.

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The new standard on leases i.e. Indian Accounting Standard (Ind AS) 116, Leases is expected to be applicable from 1 April 2019. The new standard has major impact for lessees. It eliminates the classification of leases as either finance leases or operating leases as required by Ind AS 17, Leases. It introduces a single on-balance sheet accounting model that is similar to current finance lease accounting model. Therefore, majority of operating leases will be on-balance sheet of a lessee as if it has borrowed funds to purchase an interest in the leased asset. This accounting will make entities look asset-rich but at the same time heavily indebted too.

The standard will impact the statement of profit and loss of the lessees as well. Currently, operating lease expenses are charged to statement of profit and loss on a straight-line basis over the life of a lease. Entities will now recognise a front-loaded pattern of expense for most leases even when they pay constant annual rentals.

Under the new standard, assessment of whether an arrangement is, or contains, a lease is the biggest practical issue. It introduces elaborate guidance to explain what ‘the right to direct the use of an asset’ means along with examples for identifying arrangements as a lease.

Additionally, the application of the new leases standard would be more than just an accounting change. It will have an impact on systems and processes including substantial effort required to identify all lease arrangements and extract all relevant lease data necessary to apply the standard. The change in the classification of lease in the balance sheet and statement of profit and loss will also affect key financial metrics of the lessees. This could impact debt covenants, tax balances and ability to pay dividends.

Lessor accounting would remain similar to the current practice i.e. lessors would continue to classify leases as finance lease or operating lease.

About the publication

KPMG in India’s publication ‘Lease accounting is changing - An insight with sectoral impacts’ aims to provide an overview of the key requirements of the new standard in a practical way, with the help of flowcharts and examples. We have worked with many entities across sectors who have started to analy,se the impact of the new lease standard on their balance sheet, statement of profit and loss and statement of cash flows. The publication also intends to highlight the significant practical application issues vis-à-vis different sectors with the help of certain facts and circumstances detailed in the examples used.
In practice, transactions or arrangements involving the lease arrangements may involve exercise of judgements. Therefore, interpretation and assessment of facts and circumstances of the individual transactions would be required.

We hope that you find this publication useful and we welcome any suggestions or feedback that you may have.
 

© 2019 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

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