1. Quick Overview of IND AS 116
IND AS 116 (effective 1 April 2019) replaced IND AS 17 and introduced a single on-balance-sheet model for lessees. Under the old standard, operating leases were off-balance-sheet — just a rent expense. Under IND AS 116, almost every lease now creates:
- A Right-of-Use (ROU) Asset — representing the right to use the leased asset
- A Lease Liability — representing the obligation to make future lease payments
Exemptions: Short-term leases (term ≤ 12 months) and low-value asset leases (underlying asset value ≤ USD 5,000 when new) can be kept off-balance-sheet as a policy choice.
The standard applies to all companies following IND AS — listed companies, large unlisted companies, banks, NBFCs and insurance companies. It does not apply to companies still on IGAAP (AS).
2. Example: Office Lease — Facts & Figures
We will use the same example throughout all 7 steps so you can follow the numbers from start to finish.
| Item | Details |
|---|---|
| Lease commencement date | 1 April 2024 |
| Lease term | 3 years (36 months) |
| Monthly rent | ₹1,00,000 per month |
| Payment timing | End of each month (arrears) |
| Incremental Borrowing Rate (IBR) | 10% per annum |
| Initial Direct Costs (IDC) | ₹50,000 (brokerage paid) |
| Lease incentive received | Nil |
| Restoration cost | Nil |
3. Step 1 — Identify the Lease
Before doing any calculation, confirm the contract is a lease under IND AS 116. A contract is a lease if it conveys the right to control the use of an identified asset for a period of time in exchange for consideration.
Three questions to ask:
- Is there an identified asset? (specific floor/office, specific vehicle, specific machine — yes)
- Does the lessee have the right to obtain substantially all the economic benefits from use? (yes — exclusive use of the office)
- Does the lessee have the right to direct how and for what purpose the asset is used? (yes — free to use the office as they wish)
Conclusion: All three conditions are met. This is a lease under IND AS 116 and must be recognised on balance sheet.
4. Step 2 — Determine the Lease Term
The lease term under IND AS 116 is the non-cancellable period plus:
- Optional extension periods — if the lessee is reasonably certain to exercise the extension
- Optional termination periods — if the lessee is reasonably certain NOT to terminate early
In our example, the lease is a fixed 3-year term with no extension or termination options. Lease term = 36 months.
Practical tip: "Reasonably certain" is a high threshold — higher than "more likely than not." Include extension periods only if there is a significant economic incentive to extend (e.g., leasehold improvements, location criticality, relocation costs).
5. Step 3 — Calculate the Lease Liability
The lease liability is the present value of all future lease payments, discounted at the Incremental Borrowing Rate (IBR) or the interest rate implicit in the lease (if determinable).
Using the PV of annuity formula for payments in arrears:
Lease Liability on Day 1 = ₹31,33,600
This is the amount recognised as a financial liability on the balance sheet on 1 April 2024. Total undiscounted payments = ₹36,00,000. The difference (₹4,66,400) represents the total interest cost that will be accrued over 3 years.
6. Step 4 — Calculate the ROU Asset
The ROU asset is measured at cost on Day 1 and comprises:
| Component | Amount (₹) |
|---|---|
| Initial lease liability | 31,33,600 |
| Add: Initial Direct Costs (IDC) | 50,000 |
| Add: Lease payments made on/before commencement date | — |
| Add: Estimated restoration costs (if any) | — |
| Less: Lease incentives received | — |
| ROU Asset — Day 1 | 31,83,600 |
Note: The ROU asset is depreciated on a straight-line basis over the lease term (36 months) unless ownership transfers or there is a purchase option expected to be exercised, in which case depreciate over the useful life of the asset.
Monthly depreciation = ₹31,83,600 ÷ 36 = ₹88,433 per month
7. Step 5 — Amortization Schedule (First 6 Months)
The lease liability reduces using the effective interest method. Each month: interest accrues on the opening balance, then the cash payment reduces the liability.
| Month | Opening Liability (₹) | Interest @ 0.8333% (₹) | Payment (₹) | Closing Liability (₹) | ROU Depreciation (₹) |
|---|---|---|---|---|---|
| Apr 2024 | 31,33,600 | 26,113 | 1,00,000 | 30,59,713 | 88,433 |
| May 2024 | 30,59,713 | 25,498 | 1,00,000 | 29,85,211 | 88,433 |
| Jun 2024 | 29,85,211 | 24,877 | 1,00,000 | 29,10,088 | 88,433 |
| Jul 2024 | 29,10,088 | 24,251 | 1,00,000 | 28,34,339 | 88,433 |
| Aug 2024 | 28,34,339 | 23,619 | 1,00,000 | 27,57,958 | 88,433 |
| Sep 2024 | 27,57,958 | 22,983 | 1,00,000 | 26,80,941 | 88,433 |
| … | … | … | … | … | … |
| Mar 2027 | 99,170 | 830 | 1,00,000 | 0 | 88,433 |
FY 2024-25 totals (12 months, Apr 2024 – Mar 2025):
| Item | Amount (₹) |
|---|---|
| Total interest expense (finance cost) | 2,61,744 |
| Total principal repaid | 9,38,256 |
| Total cash paid (rent) | 12,00,000 |
| ROU depreciation for the year | 10,61,196 |
| Closing lease liability (31 Mar 2025) | 21,95,344 |
Calculate Your Lease in Seconds
Skip the manual schedule — our free IND AS 116 calculator gives you the full amortization table, all journal entries and Excel export instantly.
Try the Free Calculator →8. Step 6 — Journal Entries
Day 1 — 1 April 2024 (Initial Recognition)
After JE 1 and JE 2: ROU Asset = ₹31,83,600 | Lease Liability = ₹31,33,600
Month-End — 30 April 2024 (Recurring)
Important: Under IND AS 116, there is NO rent expense. The ₹1,00,000 monthly payment splits into two P&L charges — depreciation (on ROU asset) and finance cost (interest on liability). This is a key difference from old IND AS 17 operating lease accounting.
9. Step 7 — Balance Sheet & P&L Impact
Balance Sheet as at 31 March 2025 (end of Year 1)
| Item | Amount (₹) | Classification |
|---|---|---|
| ROU Asset (gross) | 31,83,600 | Non-current assets |
| Less: Accumulated depreciation | (10,61,196) | |
| ROU Asset (net) | 21,22,404 | Non-current assets |
| Lease liability — current portion | 9,97,682 | Current liabilities |
| Lease liability — non-current portion | 11,97,662 | Non-current liabilities |
| Total lease liability | 21,95,344 |
P&L for FY 2024-25 (Year 1)
| Item | Amount (₹) | Line in P&L |
|---|---|---|
| Depreciation — ROU Asset | 10,61,196 | Operating expenses (EBITDA impact) |
| Finance cost — Interest on lease | 2,61,744 | Finance costs (below EBIT) |
| Total P&L charge (Year 1) | 13,22,940 | |
| vs. Old IND AS 17 rent expense | 12,00,000 | (operating expenses) |
EBITDA impact: Under IND AS 116, rent expense disappears from EBITDA — replaced by depreciation (which is added back). This improves EBITDA but increases finance costs and depreciation separately. Companies with many leases (retail, airlines, logistics) see EBITDA jump significantly after adopting IND AS 116.
10. Common Questions
What IBR should I use?
The Incremental Borrowing Rate is the rate at which the lessee could borrow funds to purchase a similar asset over a similar term. In practice, most Indian companies use SBI MCLR + a spread based on their credit profile. Typical range: 8%–14% p.a. for FY 2024-25. The IBR must be assessed at commencement date and reassessed on modification or lease term reassessment.
How do I split current vs. non-current lease liability?
The current portion is the principal repayment expected in the next 12 months (sum of principal components from the amortization schedule for months 1–12 of the next year). The remaining balance is non-current.
What happens if rent changes (escalation)?
If the rent escalation is fixed (e.g., 5% every year), include all escalated payments in the PV calculation from Day 1. If it is index-linked (CPI/WPI), use current payments at commencement and remeasure when the index changes. Our escalation calculator handles this automatically.
Is rent-free period included in the lease term?
Yes. Rent-free months are part of the non-cancellable lease term. During rent-free months, payment = ₹0, so the PV calculation simply has zero cash flow for those periods. The ROU asset still depreciates throughout.
What is the disclosure requirement?
IND AS 116 Para 52 requires disclosures in annual reports including: maturity analysis of lease liabilities, movement in lease liability for the year, ROU asset rollforward, depreciation and finance cost amounts, and total cash outflow for leases. Our Lease App generates this disclosure note automatically.
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