IND AS 116, Lease Bhavik Chokshi: 9819653037

INDIAN ACCOUNTING STANDARD 116 : LEASES

Illustration 1 - Short-term lease
Scenario A:
A lessee enters into a lease with a nine-month non-cancellable term with an option to extend the lease for four
months. The lease does not have a purchase option. At the lease commencement date, the lessee is reasonably
certain to exercise the extension option because the monthly lease payments during the extension period are
significantly below market rates. Whether the lessee can take a short-term exemption in accordance with Ind
AS 116?
Scenario B:
Assume the same facts as Scenario A except, at the lease commencement date, the lessee is not reasonably
certain to exercise the extension option because the monthly lease payments during the optional extension
period are at what the lessee expects to be market rates and there are no other factors that would make exercise
of the renewal option reasonably certain. Will your answer be different in this case?

Illustration 2 - Asset implicitly specified in a contract

Customer XYZ enters into a ten-year contract with Supplier ABC for the use of rolling stock specifically designed for
Customer XYZ.The rolling stock is designed to transport materials used in Customer XYZ’s production process
and is not suitable for use by other customers. The rolling stock is not explicitly specified in the contract but,
Supplier ABC owns only one rolling stock that is suitable for Customer XYZ’s use. If the rolling stock does not
operate properly, the contract requires Supplier ABC to repair or replace the rolling stock.
Whether there is an identified asset?
Illustration 3 (Asset implicitly specified in a contract):
Customer XYZ enters into a ten-year contract with Supplier ABC for the use of a car. The specification of the car is
specified in the contract (i.e., brand, type, colour, options, etc.). At inception of the contract, the car is not yet built.
Whether there is an identified asset?
Illustration 4 - Substantive Substitution Rights
Scenario A:
An electronic data storage provider (supplier) provides services through a centralised data centre that involve
the use of a specified server (Server No. 10). The supplier maintains many identical servers in a single accessible
location and determines, at inception of the contract, that it is permitted to and can easily substitute another
server without the customer’s consent throughout the period of use.
Further, the supplier would benefit economically from substituting an alternative asset, because doing this would
allow the supplier to optimise the performance of its network at only a nominal cost. In addition, the supplier has
made clear that it has negotiated this right of substitution as an important right in the arrangement, and the
substitution right affected the pricing of the arrangement.
Whether the substitution rights are substantive and whether there is an identified asset?
Scenario B:
Assume the same facts as in Scenario A except that Server No. 10 is customised, and the supplier does

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not have the practical ability to substitute the customised asset throughout the period of use. Additionally, it
is unclear whether the supplier would benefit economically from sourcing a similar alternative asset.Whether
the substitution rights are substantive and whether there is an identified asset?
Illustration 5 (Identified Asset – Physically Distinct):
Customer XYZ enters into a 15-year contract with Supplier ABC for the right to use five fibres within a fibre
optic cable between Mumbai and Pune. The contract identifies five of the cable’s 25 fibres for use by
Customer XYZ. The five fibres are dedicated solely to Customer XYZ’s data for the duration of the contract
term. Assume that Supplier ABC does not have a substantive substitution right.
Whether there is an identified asset?

Illustration 6 (Identified Asset – Not Physically Distinct):

Scenario A:
Customer XYZ enters into a ten-year contract with Supplier ABC for the right to transport oil from India to
Bangladesh through Supplier ABC’s pipeline. The contract provides that Customer XYZ will have the right
to use of 95% of the pipeline’s capacity throughout the term of thearrangement.
Whether there is an identified asset?
Scenario B:
Assume the same facts as in Scenario A, except that Customer XYZ has the right to use 65% of the
pipeline’s capacity throughout the term of the arrangement.
Whether there is an identified asset?

Illustration 7 (Right to use for a portion of the term of contract):

ABC Ltd enters into a contract with XYZ Ltd, which grants ABC Ltd exclusive rights to use a specific grain
storage facility over a five-year period in the months of May and June. During these months, ABC Ltd has
the right to decide which crops are placed in storage and when to remove them. XYZ Ltd provides the
loading and unloading services for the warehouse activities. During the other ten months each year, XYZ
Ltd has the right to determine how the warehouse will be used.
Which party has the right to control the use of the identified asset during the period of use?

Illustration 8 (Right to obtain substantially all of the economic benefits):

Company MNO enters into a 15-year contract with Power Company PQR to purchase all of the electricity
produced by a new solar farm. PQR owns the solar farm and will receive tax credits relating to the
construction and ownership of the solar farm, and MNO will receive renewable energy credits that accrue
from use of the solar farm.).
Who has the right to substantial benefits from the solar farm?

Illustration 9 - Right to direct the use of an asset

Customer X enters into a contract with Supplier Y to use a vehicle for a five-year period. The vehicle is identified
in the contract. Supplier Y cannot substitute another vehicle unless the specified vehicle is not operational (for
e.g., if it breaks down). Under the contract:
• Customer X operates the vehicle (i.e., drives the vehicle) or directs others to operate the vehicle (for
e.g., hires a driver).
• Customer X decides how to use the vehicle (within contractual limitations). For example, throughout

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the period of use, Customer X decides where the vehicle goes, as well as when or whether it is used
and what it is used for. Customer X can also change these decisions throughout the period of use.
• Supplier Y prohibits certain uses of the vehicle (for e.g., moving it overseas) and modifications to the
vehicle to protect its interest in the asset.
Whether Customer X has the right to direct the use of the vehicle throughout the period of lease?

Illustration 10 - Right to direct the use of an asset

Entity A contracts with Supplier H to manufacture parts in a facility. Entity A designed the facility and
provided its specifications. Supplier H owns the facility and the land. Entity A specifies how many parts it
needs and when it needs the parts to be available. Supplier H operates the machinery and makes all
operating decisions including how and when the parts are to be produced, as long as it meets the
contractual requirements to deliver the specified number on the specified date. Assuming supplier H cannot
substitute the facility and hence is an identified asset.
Which party has the right to control the use of the identified asset (i.e., equipment) during the period of
use?

Illustration 11 - Right to direct the use of an asset

Entity L enters into a five—year contract with Company A, a ship owner, for the use of an identified ship.
Entity L decides whether and what cargo will be transported, and when and to which ports the ship will sail
throughout the period of use, subject to restrictions specified in the contract. These restrictions prevent
Entity L from sailing the ship into waters at a high risk of piracy or carrying explosive materials as cargo.
Company A operates and maintains the ship, and is responsible for safe passage.
Who has the right to direct the use of the ship during the period of use?

Illustration 12 - Identifying and separating lease components

Scenario A:
A lessee enters a lease of an excavator and the related accessories (for e.g., excavator attachments) that are
used for mining purposes. The lessee is a local mining company that intends to use the excavator at a copper
mine. How many lease and non-lease components are there?
Scenario B:
Assume the same facts as in Scenario A, except that the contract also conveys the right to use an
additional loading truck. This loading truck could be deployed by the lessee for other uses (for e.g., to
transport iron ores at another mine).
Illustration 13 - Identifying different components in the contract
Entity L rents an office building from Landlord M for a term of 10 years. The rental contract stipulates that the
office is fully furnished and has a newly installed and tailored HVAC system. It also requires Landlord M to
perform all common area maintenance (CAM) during the term of the arrangement. Entity L makes single
monthly rental payment and does not pay for the maintenance separately. The office building has a useful life of
40 years and the HVAC system and office furniture each has a life of 15 years.
What are the units of account in the lease?

Illustration 14 - Activities which are not components of a lease contract

Scenario A:
A lessee enters into a five-year lease of equipment, with fixed annual payments of ₹ 10,000. The contract

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contains fixed annual payments as follows: ₹ 8,000 for rent, ₹ 1,500 for maintenance and ₹ 500 of
administrative tasks. How the consideration would be allocated?
Scenario B:
Assume the fact pattern as in scenario A except that, in addition, the contract requires the lessee to pay for
the restoration of the equipment to its original condition. How the consideration would be allocated?

Illustration 15 - Allocating contract consideration to lease and non-lease components – Lessees

A lessee enters into a lease of an equipment. The contract stipulates the lessor will perform maintenance
of the leased equipment and receive consideration for that maintenance service. The contract includes the
following fixed prices for the lease and non-lease component:

Lease ₹ 80,000
Maintenance ₹ 10,000
Total ₹ 90,000
Assume the stand-alone prices cannot be readily observed, so the lessee makes estimates, maximizing
the use of observable information, of the lease and non-lease components, as follows:

Lease ₹ 85,000
Maintenance ₹ 15,000
Total ₹ 1,00,000
In the given scenario, assuming lessee has not opted the practical expedient, how will the lessee allocate
the consideration to lease and non-lease component?

Illustration 16 - Determining the lease term

Scenario A:
Entity ABC enters into a lease for equipment that includes a non-cancellable term of six years and a two-
year fixed-priced renewal option with future lease payments that are intended to approximate market rates
at lease inception. There are no termination penalties or other factors indicating that Entity ABC is reasonably
certain to exercise the renewal option. What is the lease term?
Scenario B:
Entity XYZ enters into a lease for a building that includes a non-cancellable term of eight years and a two-
year, market-priced renewal option. Before it takes possession of the building, Entity XYZ pays for
leasehold improvements. The leasehold improvements are expected to have significant value at the end of
eight years, and that value can only be realised through continued occupancy of the leased property. What
is the lease term?
Scenario C:
Entity PQR enters into a lease for an identified retail space in a shopping centre. The retail space will be
available to Entity PQR for only the months of October, November and December during a non-cancellable
term of seven years. The lessor agrees to provide the same retail space for each of the seven years. What
is the lease term?

Illustration 17 - Re-assessment of exercise of lease extension option

Retailer M enters into a five-year lease for a building floor, followed by two successive five-year renewal options.
On the commencement date, Retailer M is not reasonably certain to exercise the extension option.

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At the end of third year, Retailer M extended to include another floor from year 4 due to a business
acquisition. For this purpose, the lessee concludes a separate seven-year lease for an additional floor in
the building already leased. Is Retailer M required to reassess the lease term in this case?

Illustration 18 - Re-assessment of non-cancellable period of lease

Company N has taken 10 vehicles on lease for an initial period of 5 years with an extension option at the
option of the lessee for a further period of 5 years at the same rental amount. The remaining useful life of
the vehicles as on the commencement date of the lease is 15 years. Company N has determined at the
commencement date that it is reasonably certain to exercise the extension option and hence it has taken a
period of 10 years for the lease. At the end of 4th year, there is an announcement by the government that all
the cars of this particular model have to be discontinued from the road within 1 year due to the change in
the pollution norms in the country. Will the lease term be reassessed in this case?
Illustration 19 - Determining the fixed payments
Entity M and Lessor A enter into a 10-year lease of an office building for fixed annual lease payments of ₹
200,000. Per the terms of the lease agreement, annual fixed lease payments comprise ₹ 170,000 for rent and
₹ 30,000 for real estate taxes.
What are the fixed lease payments for purposes of classifying the lease?
Illustration 20 - In substance fixed lease payments
Entity Q enters into a seven-year lease for a piece of machinery. The contract sets out the lease payments as
follows.
– If Q uses the machinery within a given month, then an amount of 2,000 accrues for that month.
– If Q does not use the machinery within a given month, then an amount of 1,000 accrues for that
month.
What is considered as lease payment in this case?

Illustration 21 - In-substance fixed lease payment

Entity P enters into a five-year lease for office space with Entity Q. The initial base rent is ₹ 1 lakh per
month. Rents increase by the greater of 1% of Entity P’s generated sales or 2% of the previous rental rate
on each anniversary of the lease commencement date. What are the lease payments for purposes of
measuring lease liability?

Illustration 22 - In substance fixed lease payments

Company N leases a production line. The lease payments depends on the number of operating hours of the
production line – i.e., N has to pay ₹ 1,000 per hour of use. The annual minimum payment is ₹ 10,00,000.
The expected usage per year is 1,500 hours
Illustration 23 - Variable lease payments that depend on an index or rate
An entity enters into a 10-year lease of property. The lease payment for the first year is
₹ 1,000. The lease payments are linked to the consumer price index (CPI), i.e., not a floating interest rate.
The CPI at the beginning of the first year is 100. Lease payments are updated at the end of every second
year. At the end of year one, the CPI is 105. At the end of year two, the CPI is 108. What should be
included in lease payments?

Illustration 24 - Variable lease payments that do not depend on an index or rate

Entity XYZ is a medical equipment manufacturer and a supplier of the related consumables. Customer ABC
operates a medical centre. Under the agreement entered into by both parties, Entity XYZ grants Customer

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ABC the right to use a medical laboratory machine at no cost and Customer ABC purchases consumables
for use in the equipment from Entity XYZ at ₹ 100 each.
The consumables can only be used for that equipment and Customer ABC cannot use other consumables as
substitutes. There is no minimum purchase amount required in the contract.
Based on its historical experience, Customer ABC estimates that it is highly likely to purchase at least
8,000 units of consumables annually. Customer ABC has appropriately assessed that the arrangement
contains a lease of medical equipment. There are no residual value guarantees or other forms of
consideration included in the contract. Whether these payments affect the calculation of lease liability and
ROU Asset? How does Entity XYZ and Customer ABC would allocate these lease payments?

Illustration 25 - Variable lease payments

Entity A enters into a five-year lease of an office building. The lease payments are ₹ 5,00,000 per year
and the contract includes an additional water charge calculated as ₹ 0.50 per litre consumed. Payments
are due at the end of year. Entity A elects to apply the practical expedient to combine lease and non-lease
components

Illustration 26 - Residual value guarantee included in lease payments

An entity (a lessee) enters into a lease and guarantees that the lessor will realise ₹ 20,000 from selling the
asset to another party at the end of the lease. At lease commencement, based on the lessee’s estimate of
the residual value of the underlying asset, the lessee determines that it expects that it will owe ₹ 8,000 at
the end of the lease. Whether the lessee should include the said payment of ₹ 8,000 as a lease
payment?

Illustration 27: Initial measurement of lease liability

Entity L enters into a lease for 10 years, with a single lease payment payable at the beginning of each year. The
initial lease payment is ₹ 100,000. Lease payments will increase by the rate of LIBOR each year. At the date of
commencement of the lease, LIBOR is 2 per cent.
Assume that the interest rate implicit in the lease is 5 per cent. How lease liability is initially measured?

Illustration 28: Measuring right-of-use asset

Entity Y and Entity Z execute a 12-year lease of a railcar with the following terms on January 1, 2016:
 The lease commencement date is February 1, 2016.
 Entity Y must pay Entity Z the first monthly rental payment of ₹ 10,000 upon execution of the lease.
 Entity Z will pay Entity Y ₹ 50,000 cash incentive to enter into the lease payable upon lease execution.
Entity Y incurred ₹ 1,000 of initial direct costs, which are payable on February 1, 2016. Entity Y calculated
the initial lease liability as the present value of the lease payments discounted using its incremental
borrowing rate because the rate implicit in the lease could not be readily determined; the initial lease
liability is ₹ 850,000.
How would Lessee Company measure and record this lease?

Illustration 29 - Dismantling costs to be included in initial measurement of ROU Asset

Company H leases an aircraft for a period of 5 years. The aircraft must undergo a planned check after every
100,000 flight hours. At the end of the lease, company H must have a check performed (or refund the costs to
the lessor), irrespective of the actual number of flight hours. What are the lease payments for purposes of
calculating ROU asset?

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Illustration 30 - Lessee Accounting

Entity ABC (lessee) enters into a three-year lease of equipment. Entity ABC agrees to make the following annual
payments at the end of each year:
₹ 20,000 in year one
₹ 30,000 in year two
₹ 50,000 in year three.
For simplicity purposes, there are no other elements to the lease payments (like purchase options, lease
incentives from the lessor or initial direct costs). Assumed a discount rate of 12% (which is Entity ABC’s
incremental borrowing rate because the interest rate implicit in the lease cannot be readily determined). Entity
ABC depreciates the ROU Asset on a straight-line basis over the lease term.
How would Entity ABC would account for the said lease under Ind AS 116?

Illustration 31 - Subsequent measurement using cost model

Company EFG enters into a property lease with Entity H. The initial term of the lease is 10 years with a 5- year
renewal option. The economic life of the property is 40 years and the fair value of the leased property is ₹ 50
Lacs. Company EFG has an option to purchase the property at the end of the lease term for ₹ 30 lacs. The first
annual payment is ₹ 5 lacs with an increase of 3% every year thereafter. The implicit rate of interest is 9.04%.
Entity H gives Company EFG an incentive of ₹ 2 lacs (payable at the beginning of year 2), which is to be used
for normal tenant improvement.
Company EFG is reasonably certain to exercise that purchase option. How would EFG measure the right- of-
use asset and lease liability over the lease term?
Illustration 32- Remeasurement of a lease with variable lease payments
Entity W entered into a contract for lease of retail store with Entity J on January 01/01/2017. The initial term
of the lease is 5 years with a renewal option of further 3 years. The annual payments for initial term and
renewal term is ₹ 100,000 and ₹ 110,000 respectively. The annual lease payment will increase based on
the annual increase in the CPI at the end of the preceding year. For example, the payment due on
01/01/18 will be based on the CPI available at 31/12/17.
Entity W’s incremental borrowing rate at the lease inception date and as at 01/01/2020 is 5% and 6%
respectively and the CPI at lease commencement date and as at 01/01/2020 is 120 and 125 respectively.
At the lease commencement date, Entity W did not have a significant economic incentive to exercise the
renewal option. In the first quarter of 2020, Entity W installed unique lease improvements into the retail
store with an estimated five-year economic life. Entity W determined that it would only recover the cost of
the improvements if it exercises the renewal option, creating a significant economic incentive to extend.
Is Entity W required to remeasure the lease in the first quarter of 2020?

Illustration 33 - Modification that is a separate lease

Lessee enters into a 10-year lease for 2,000 square metres of office space. At the beginning of Year 6,
Lessee and Lessor agree to amend the original lease for the remaining five years to include an additional
3,000 square metres of office space in the same building. The additional space is made available for use by
Lessee at the end of the second quarter of Year 6. The increase in total consideration for the lease is
commensurate with the current market rate for the new 3,000 square metres of office space, adjusted for
the discount that Lessee receives reflecting that Lessor does not incur costs that it would otherwise have
incurred if leasing the same space to a new tenant (for example, marketing costs).
How should the said modification be accounted for?

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Illustration 34 - Modification that increases the scope of the lease by extending the contractual lease
term
Lessee enters into a 10-year lease for 5,000 square metres of office space. The annual lease payments are
₹ 1,00,000 payable at the end of each year. The interest rate implicit in the lease cannot be readily
determined. Lessee’s incremental borrowing rate at the commencement date is 6% p.a. At the beginning
of Year 7, Lessee and Lessor agree to amend the original lease by extending the contractual lease term by
four years. The annual lease payments are unchanged (i.e., ₹ 1,00,000 payable at the end of each year
from Year 7 to Year 14). Lessee’s incremental borrowing rate at the beginning of Year 7 is 7% p.a.
How should the said modification be accounted for?
Illustration 35 - Modification that decreases the scope of the lease
Lessee enters into a 10-year lease for 5,000 square metres of office space. The annual lease payments
are ₹ 50,000 payable at the end of each year. The interest rate implicit in the lease cannot be readily
determined. Lessee’s incremental borrowing rate at the commencement date is 6% p.a. At the beginning
of Year 6, Lessee and Lessor agree to amend the original lease to reduce the space to only 2,500 square
metres of the original space starting from the end of the first quarter of Year 6. The annual fixed lease
payments (from Year 6 to Year 10) are ₹ 30,000. Lessee’s incremental borrowing rate at the beginning of
Year 6 is 5% p.a.
How should the said modification be accounted for?
Illustration 36 - Modification that is a change in consideration only
Lessee enters into a 10-year lease for 5,000 square metres of office space. At the beginning of Year 6,
Lessee and Lessor agree to amend the original lease for the remaining five years to reduce the lease
payments from ₹ 1,00,000 per year to ₹ 95,000 per year. The interest rate implicit in the lease cannot be
readily determined. Lessee’s incremental borrowing rate at the commencement date is 6% p.a. Lessee’s
incremental borrowing rate at the beginning of Year 6 is 7% p.a. The annual lease payments are
payable at the end of each year.
How should the said modification be accounted for?
Illustration 37 - Modification that both increases and decreases the scope of the lease
Lessee enters into a 10-year lease for 2,000 square metres of office space. The annual lease payments are ₹
1,00,000 payable at the end of each year. The interest rate implicit in the lease cannot be readily determined.
Lessee’s incremental borrowing rate at the commencement date is 6% p.a.
At the beginning of Year 6, Lessee and Lessor agree to amend the original lease to:
(a) include an additional 1,500 square metres of space in the same building starting from the beginning of
Year 6 and
(b) reduce the lease term from 10 years to eight years. The annual fixed payment for the 3,500 square
metres is ₹ 1,50,000 payable at the end of each year (from Year 6 to Year 8). Lessee’s incremental
borrowing rate at the beginning of Year 6 is 7% p.a.
The consideration for the increase in scope of 1,500 square metres of space is not commensurate with the
stand-alone price for that increase adjusted to reflect the circumstances of the contract. Consequently, Lessee
does not account for the increase in scope that adds the right to use an additional 1,500 square metres of space
as a separate lease.
How should the said modification be accounted for?
Illustration 38 - Lessor accounting for a finance lease  dealer-lessor case
A Lessor enters into a 10-year lease of equipment with Lessee. The equipment is not specialised in nature
and is expected to have alternative use to Lessor at the end of the 10-year lease term. Under the lease:
 Lessor receives annual lease payments of ₹ 15,000, payable at the end of the year

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 Lessor expects the residual value of the equipment to be ₹ 50,000 at the end of the 10-year lease term
 Lessee provides a residual value guarantee that protects Lessor from the first ₹ 30,000 of loss for a
sale at a price below the estimated residual value at the end of the lease term (i.e.,
₹ 50,000)
Illustration 39 - Classification of a sublease in case of an Intermediate Lessor
Entity ABC (original lessee/intermediate lessor) leases a building for five years. The building has an
economic life of 40 years. Entity ABC subleases the building for four years.
How should the said sublease be classified by Entity ABC?
Illustration 40 - Intermediate Lessor – Where the sublease is classified as a ‘Finance Lease’
Head lease:
An intermediate lessor enters into a five-year lease for 10,000 square metres of office space (the head lease)
with Entity XYZ (the head lessor).
Sublease:
At the beginning of Year 3, the intermediate lessor subleases the 10,000 square metres of office space for the
remaining lease term i.e three years of the head lease to a sub-lessee.
How should the said sublease be classified and accounted for by the Intermediate Lessor?
Illustration 41 - Intermediate Lessor – Where the sublease is classified as a ‘Operating Lease’
Head lease:
An intermediate lessor enters into a five-year lease for 10,000 square metres of office space (the head lease)
with Entity XYZ (the head lessor).
Sublease:
At the commencement of the head lease, the intermediate lessor subleases the 10,000 square metres of office
space for two years to a sub-lessee.
How should the said sublease be classified and accounted for by the Intermediate Lessor?
Illustration 42 - Sale and leaseback transaction
An entity (Seller-lessee) sells a building to another entity (Buyer-lessor) for cash of ₹ 30,00,000. Immediately
before the transaction, the building is carried at a cost of ₹ 15,00,000. At the same time, Seller-lessee enters
into a contract with Buyer-lessor for the right to use the building for 20 years, with annual payments of ₹
2,00,000 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 for determining when a performance obligation is satisfied in Ind AS 115 Revenue from
Contracts with Customers.
The fair value of the building at the date of sale is ₹ 27,00,000. Initial direct costs, if any, are to be
ignored. The interest rate implicit in the lease is 12% p.a., which is readily determinable by Seller-lessee.
Buyer-lessor classifies the lease of the building as an operating lease.
How should the said transaction be accounted by the Seller-lessee and the Buyer-lessor?
Illustration 43 - Transition Approaches
A retailer (lessee) entered into 3-year lease of retail space beginning at 1 April 2017 with three annual lease
payments of ₹ 2,00,000 due on 31 March 2018, 2019 and 2020, respectively. The lease is classified as an
operating lease under Ind AS 17. The retailer initially applies Ind AS 116 for the first time in the annual period
beginning at 1 April 2019. The incremental borrowing rate at the date of the initial application (i.e., 1
April 2019) is 10% p.a. and at the commencement of the lease (i.e., 1 April 2017) was 12% p.a. The ROU
asset is subject to straight-line depreciation over the lease term. Assume that no practical expedients are

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elected, the lessee did not incur initial direct costs, there were no lease incentives and there were no
requirements for the lessee to dismantle and remove the underlying asset, restore the site on which it is located
or restore the underlying asset to the condition under the terms and conditions of the lease.
What would be the impact for the lessee using all the following transition approaches: Full
Retrospective Approach
Modified Retrospective Approach
- Alternative 1
- Alternative 2

Illustration 44

A lessee enters into a ten-year contract with a lessor (freight carrier) to transport a specified quantity
of goods. Lessor uses rail wagons of a particular specification, and has a large pool of similar rail
wagons that can be used to fulfil the requirements of the contract. The rail wagons and engines are
stored at lessor’s premises when they are not being used to transport goods. Costs associated with
substituting the rail wagons are minimal for lessor.
Whether the lessor has substantive substitutions rights and whether the arrangement contains
a lease?
Illustration 45
Customer M enters into a 20-year contract with Energy Supplier S to install, operate and maintain a
solar plant for M’s energy supply. M designed the solar plant before it was constructed – M hired
experts in solar energy to assist in determining the location of the plant and the engineering of the
equipment to be used. M has the exclusive right to receive and the obligation to take any energy
produced. Whether it can be established that M is having the right to control the use of identified
asset?
Illustration 46
A Customer enters into a ten-year contract with a Company (a ship owner) for the use of an identified
ship. Customer decides whether and what cargo will be transported, and when and to which ports the
ship will sail throughout the period of use, subject to restrictions specified in the contract. These
restrictions prevent the company from sailing the ship into waters at a high risk of piracy or carrying
explosive materials. The company operates and maintains the ship, and is responsible for safe
passage.
Does the customer has the right to direct how and for what purpose the ship is to be used
throughout the period of use and whether the arrangement contains a lease?
Illustration 47
A Lessee enters into a ten-year lease contract with a Lessor to use an equipment. The contract
includes maintenance services (as provided by lessor). The Lessor obtains its own insurance for the
equipment. Annual payments are ₹ 10,000 (₹ 1,000 relate to maintenance services and ₹ 500 to
insurance costs).
The Lessee is able to determine that similar maintenance services and insurance costs are offered by third
parties for ₹ 2,000 and ₹ 500 a year, respectively. The Lessee is unable to find an observable stand-alone
rental amount for a similar equipment because none is leased without related maintenance services
provided by the lessor.
How would the Lessee allocate the consideration to the lease component?

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Illustration 48
A Lessee enters into a non-cancellable lease contract with a Lessor to lease a building. Initially, the
lease is for five years, and the lessee has the option to extend the lease by another five years at the
same rental.
To determine the lease term, the lessee considers the following factors:
 Market rentals for a comparable building in the same area are expected to increase by
10% over the ten-year period covered by the lease. At inception of the lease, lease rentals
are in accordance with current market rents.
 The lessee intends to stay in business in the same area for at least 20 years.
 The location of the building is ideal for relationships with suppliers and customers.
What should be the lease term for lease accounting under Ind AS 116?

Illustration 49

A Lessee enters into a lease of a five-year-old machine. The non-cancellable lease term is 15 years.
The lessee has the option to extend the lease after the initial 15-year period for optional periods of 12
months each at market rents.
To determine the lease term, the lessee considers the following factors:
 The machine is to be used in manufacturing parts for a type of plane that the lessee
expects will remain popular with customers until development and testing of an improved
model are completed in approximately 15 years.
 The cost to install the machine in lessee’s manufacturing facility is significant.
 The non-cancellable term of lessee’s manufacturing facility lease ends in 19 years, and
the lessee has an option to renew that lease for another twelve years.
 Lessee does not expect to be able to use the machine in its manufacturing process for
other types of planes without significant modifications.
 The total remaining life of the machine is 30 years.
What should be the lease term for lease accounting under Ind AS 116?
Illustration 50
A Company leases a manufacturing facility. The lease payments depend on the number of operating hours of
the manufacturing facility, i.e., the lessee has to pay ₹ 2,000 per hour of use. The annual minimum payment
is ₹ 2,00,00,000. The expected usage per year is 20,000 hours.
Whether the said payments be included in the calculation of lease liability under Ind AS 116?

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