What are escalation rents and how are they treated under IND AS 116?

Escalation rents are lease payments that increase by a fixed percentage at specified intervals. Under IND AS 116, these are classified as fixed in-substance payments. The present value of all future escalated payments must be included in the lease liability at commencement.

What is the difference between Model 1 (flat rent) and Model 3 (escalation rent)?

Model 1 assumes a constant rent throughout the lease term. Model 3 handles leases where the rent increases at regular intervals by a fixed percentage. Use Model 3 whenever your lease agreement contains a rent escalation clause.

Does IND AS 116 require remeasurement when rent escalation occurs?

No. If the escalation rate was fixed and contractually specified at commencement, no remeasurement is required when the escalation actually happens. Remeasurement is only triggered by changes to the lease term, changes to the discount rate, or modifications to the underlying lease agreement.

What journal entries are needed for an escalating rent lease under IND AS 116?

Four entries: (1) Commencement — Dr. ROU Asset / Cr. Lease Liability. (2) Each period Finance charge — Dr. Finance Cost / Cr. Lease Liability. (3) Each period Payment — Dr. Lease Liability / Cr. Bank. (4) Each period Depreciation — Dr. Depreciation / Cr. Accumulated Depreciation on ROU Asset.

IND AS 116 Calculator with Escalation Rents (Model 3) | Free

IND AS 116 para 26 IFRS 16 aligned Model 3

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Lease Parameters

⚠ Please fix the following before calculating:

Core Lease Details Required

Commencement Date

Required

Lease Term

Enter 1–600

Term Unit

IBR — Incremental Borrowing Rate (% p.a.)

Enter IBR between 0.1% and 50%

Entity Type	Typical IBR Range	Reference Rate
Listed / Large Companies	7% – 10%	SBI MCLR 1-yr
Mid-size Companies	9% – 13%	MCLR + spread
MSMEs	11% – 16%	Bank base rate + risk
Start-ups / Early Stage	14% – 20%	NBFC / venture debt rate
Government / PSU entities	6% – 8%	G-sec yield / Repo rate

Payment Details Module 1

Lease Payment (₹)

Enter EXCLUDING GST — GST is not part of the lease liability under IND AS 116

Enter valid amount

Payment Frequency

Payment Timing

Contractual Rent Structure Version 1

Constant Rent % Escalation Fixed ₹ Escalation Custom Rent Table 📈 CPI / Index-Linked Rent NEW

Contractual escalations known at commencement are included in initial lease liability per Ind AS 116 para 26

Rent-Free Period Version 2

No Rent-Free Period Rent-Free Applicable

Rent-free periods are part of the lease term. Payments are zero during rent-free periods; lease liability is calculated on actual contractual cashflows per Ind AS 116.

Extension / Renewal Option Para 19 & 44

No Extension Option Reasonably Certain to Extend

If exercise of extension option is reasonably certain at commencement, include it in the lease term per IND AS 116 para 19. This is NOT a modification — it is part of initial measurement.

⚠️ Short-Term Lease Exemption Available (IND AS 116 para 5(a)):
This lease term is 12 months or less. You may elect to expense lease payments directly to P&L without recognising a ROU asset or lease liability.

I elect the short-term exemption — expense payments directly to P&L (no ROU / liability)

Initial Direct Costs & Incentives Module 2

Initial Direct Costs (₹)

Legal fees, broker, stamp duty

Lease Incentives Received (₹)

Fit-out, rent-free deduction

Reporting Date Snapshot Module 3

Reporting / Balance Sheet Date

Leave blank to skip snapshot (e.g. 31 March 20XX)

IND AS 116 / IFRS 16 — Model 3 Compliance
Effective interest method for lease liability. ROU Asset = PV of lease payments + IDC − Incentives. SLM depreciation over full lease term.

Version 1 — Escalation Rents: Contractual escalations (fixed % or ₹) known at commencement are included in initial PV per para 26(a). Not a modification.
Version 2 — Rent-Free Period: Zero-payment periods are part of the lease term. Interest accrues during rent-free periods. Not a remeasurement.
Version 3 — Extension Option: If exercise is reasonably certain at commencement, extension periods are included in lease term per para 19. Not a modification.

Enter all payments excluding GST. Lease term should not include unexercised extension options unless reasonably certain.

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IND AS 116 / IFRS 16 — Lease Accounting Workpaper (Model 3)

Prepared:

Generated with Finosutra.com · For internal use only

Calculation Results ✓ Ind AS 116 Compliant

#	Period	Opening Liability	Interest	Payment	Principal	Closing Liability	ROU Dep.	ROU Closing NBV

Enter both reporting dates to compare balance sheet positions across two periods.

Current Year End

Prior Year End

Run the calculation to generate the disclosure note.

IND AS 116 Para 46(b) — On early termination, derecognise the ROU asset and lease liability. Any difference is a gain or loss in P&L.

Termination Effective Date

Termination Penalty (₹)

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Frequently Asked Questions — IND AS 116 Model 3

What is the difference between IND AS 116 Model 1 and Model 2?

Model 1 (Full Retrospective) applies IND AS 116 as if it had always been in effect — restating all prior periods. Model 2 (Modified Retrospective) applies the standard from the transition date only, with no restatement of comparatives. Under Model 2, the ROU asset at transition is set equal to the lease liability (adjusted for prepaid/accrued rent), which simplifies the transition. Most Indian companies adopted Model 2 on transition to IND AS 116 due to its lower cost and complexity.

How is the ROU asset measured at transition under Model 2?

Under Model 2, the ROU asset at commencement equals the lease liability (present value of remaining payments discounted at the IBR on the transition date), adjusted for any prepaid rent or accrued lease payments, plus initial direct costs. This is simpler than Model 1, which requires measuring the ROU asset as if the standard had always applied. The lease liability is always calculated as the PV of remaining lease payments at the IBR on the transition date.

What discount rate is used under IND AS 116 Model 2?

Under Model 2 (Modified Retrospective), the lessee uses the Incremental Borrowing Rate (IBR) as at the date of initial application — not the rate at the original commencement date of the lease. This is a key practical difference from Model 1. The IBR is the rate a lessee would pay to borrow funds on a collateralised basis over a similar term and in a similar economic environment.

How are escalation rents and rent-free periods handled in Model 2?

Contractual escalations (fixed % or fixed ₹ amounts) known at commencement are included in the initial PV calculation per IND AS 116 para 26(a). Rent-free periods are treated as zero-payment periods within the lease term — interest still accrues on the outstanding liability during those periods. Neither is treated as a lease modification; they are part of the original lease terms factored into the initial measurement.

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IND AS 116 Model 3Escalation Rents & Rent-Free Periods

Frequently Asked Questions — IND AS 116 Model 3

IND AS 116 Model 3
Escalation Rents & Rent-Free Periods