When the Ministry of Corporate Affairs notified Ind AS 116 on 30 March 2019, effective for periods beginning on or after 1 April 2019, it fundamentally changed how Indian enterprises account for their leases.
Under the previous standard (Ind AS 17), most operating leases — retail store leases, warehouse leases, office leases, equipment leases — stayed off the balance sheet. Under Ind AS 116, almost all of those leases came onto the balance sheet. Every qualifying lease requires a Right-of-Use (ROU) asset — representing the lessee's right to use the leased asset over the lease term — and a Lease liability — representing the lessee's obligation to make lease payments, measured at the present value of future payments.
For a large Indian retailer with 200 store leases, this is not a footnote exercise. It is a significant balance sheet event — hundreds of crores of assets and liabilities that need to be calculated, maintained, and reported accurately every period. This guide explains what Ind AS 116 requires, how the calculations work, where Indian enterprises most commonly get it wrong, and how to automate it.
What Ind AS 116 Is and Who It Applies To
Ind AS 116 is India's adoption of IFRS 16, the international lease accounting standard. Who must comply:
- All companies required to follow Indian Accounting Standards (Ind AS) — generally companies listed on Indian stock exchanges and large unlisted companies above specified thresholds
- Subsidiaries of Indian Ind AS companies
- Indian subsidiaries of global companies reporting under IFRS
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. Two practical exemptions exist: short-term leases (12 months or less) and low-value asset leases (typically below approximately $5,000 USD equivalent).
The Core Calculations — Step by Step
Step 1 — Identify all qualifying leases
Finance must collaborate with Legal, Operations, and Real Estate to inventory all contracts that may contain leases — not just obvious real estate and vehicle contracts but also service contracts that bundle the right to use a specific identified asset (embedded leases). For a retailer with 200 stores, this means identifying and assessing 200+ store lease contracts plus additional contracts for vehicles, equipment, warehouses, and offices.
Step 2 — Determine the lease term
The lease term is not simply the non-cancellable period on the contract. Under Ind AS 116, the lease term includes the non-cancellable period plus renewal option periods where the lessee is reasonably certain to exercise the renewal option, less break option periods where the lessee is reasonably certain to exercise the break option. Example: A store lease has a non-cancellable period of 3 years with two 3-year renewal options. If the lessee is reasonably certain to exercise both options, the lease term used for accounting purposes is 9 years — not 3. The ROU asset and lease liability are 3x larger than if only the non-cancellable period is used.
Step 3 — Determine the discount rate
Ind AS 116 specifies using the interest rate implicit in the lease if it can be readily determined; otherwise, use the lessee's incremental borrowing rate (IBR). In practice, the implicit rate is rarely determinable for commercial property leases. The IBR represents the rate of interest the lessee would have to pay to borrow funds over a similar term and with similar security to obtain an asset of similar value. IBRs for Indian enterprise retail leases typically range from 8% to 12% depending on the enterprise's credit profile and the lease term.
Step 4 — Calculate the lease liability at commencement
The lease liability at commencement date is the present value of lease payments not yet paid, discounted at the IBR. Lease payments included in the liability comprise fixed payments (less any lease incentives receivable), variable payments linked to an index or rate such as CPI-linked escalations (using the index at commencement), and amounts payable under residual value guarantees. Variable payments not linked to an index or rate — such as revenue-linked rent (percentage rent) — are excluded from the lease liability and expensed as incurred.
Numerical example: Store lease: ₹8,00,000/month rent, 9-year lease term (3 + 3 + 3 with renewals considered reasonably certain), 10% IBR. Lease liability at commencement = PV of ₹8,00,000 per month for 108 months at 0.797% monthly rate = approximately ₹5.89 crore. For a 200-store retailer with average monthly rent of ₹8,00,000, the total lease liability on the balance sheet would be in the range of ₹1,000–1,200 crore.
Step 5 — Calculate the Right-of-Use asset at commencement
The Right-of-Use asset is initially measured at cost, comprising the amount of the lease liability at commencement, plus any lease payments made at or before commencement (prepaid rent, less lease incentives received), plus any initial direct costs incurred by the lessee. In most commercial retail lease situations, the ROU asset at commencement approximately equals the lease liability at commencement — adjusted for prepaid rent and initial direct costs.
Step 6 — Subsequent measurement of the lease liability
After commencement, the lease liability is measured using the effective interest method: the liability increases by the interest accrued each period (lease liability × IBR × time period) and decreases by the lease payments actually made. Journal entries each period:
- Debit: Interest expense (P&L) — interest component
- Debit: Lease liability — principal reduction component
- Credit: Cash / bank — total lease payment
Step 7 — Subsequent measurement of the ROU asset
The ROU asset is depreciated on a straight-line basis over the lease term (in most commercial retail lease cases). Journal entry each period: Debit Depreciation expense (P&L), Credit Accumulated depreciation — ROU asset.
Step 8 — Remeasurement events
The lease liability (and corresponding ROU asset) must be remeasured when there is a change in the lease term, a change in future lease payments resulting from a change in an index or rate such as CPI-linked escalation triggers, or a lease modification that is not accounted for as a separate lease. Each remeasurement requires recalculating the present value of revised future lease payments using a revised discount rate.
The Financial Statement Impact
| Metric | Direction of change | Reason |
|---|---|---|
| Total assets | Increases | ROU assets added to balance sheet |
| Total liabilities | Increases | Lease liabilities added to balance sheet |
| Debt-to-equity ratio | Increases | Liabilities increase faster than equity |
| EBITDA | Increases | Lease payments no longer in operating expenses — replaced by depreciation and interest (both below EBITDA) |
| EBIT | Roughly neutral | Depreciation replaces rent in operating expenses |
| Net profit — early years | Decreases | Front-loaded interest + depreciation exceeds straight-line rent |
| Net profit — later years | Increases | Interest reduces over time — expense profile flattens |
| Operating cash flow | Improves | Lease payments now classified partly as financing cash flow |
The Most Common Ind AS 116 Compliance Mistakes in India
Mistake 1 — Incomplete lease inventory. Not all qualifying leases are identified. Embedded leases in service contracts — IT infrastructure contracts, logistics contracts, manufacturing arrangements — are often missed.
Mistake 2 — Incorrect lease term. Using only the non-cancellable period without assessing renewal option probability. For Indian retailers who consistently renew their prime store locations, this omission significantly understates the lease liability.
Mistake 3 — Single IBR applied across all leases. Using a single blended IBR for all leases regardless of commencement date, lease term, or currency. This creates systematic error in the lease liability calculation.
Mistake 4 — Excluding variable payments that should be included. CPI-linked rent escalations use the CPI index at commencement — they are included in the lease liability calculation. Teams using spreadsheets often exclude these incorrectly.
Mistake 5 — Failing to remeasure after modification or option reassessment. When lease terms are modified, when renewal option probability changes, or when CPI-linked escalations trigger, the lease liability and ROU asset must be remeasured. Manual spreadsheet systems frequently miss these triggers.
Mistake 6 — Incorrect depreciation period. Depreciating the ROU asset over the useful life of the underlying asset rather than the lease term — particularly for short-to-medium lease terms where the lease term is shorter than the building's useful life.
Ind AS 116 vs IFRS 16 — Key Similarities and Differences
| Aspect | Ind AS 116 | IFRS 16 | Difference |
|---|---|---|---|
| Effective date | 1 April 2019 | 1 January 2019 | Minor timing difference |
| Lessee accounting model | Single model — all leases on balance sheet | Single model — all leases on balance sheet | Identical |
| Short-term exemption | Leases ≤ 12 months | Leases ≤ 12 months | Identical |
| Low-value exemption | Available | Available | Identical |
| Discount rate | IBR or implicit rate | IBR or implicit rate | Identical |
| Transition approaches | Full retrospective or modified retrospective | Full retrospective or modified retrospective | Identical |
| Revenue-linked variable rent | Excluded from liability | Excluded from liability | Identical |
| Applicable standard body | MCA / ICAI | IASB | Different regulatory framework |
How to Automate Ind AS 116 / IFRS 16 Compliance
Manual Ind AS 116 compliance — spreadsheets with individual lease tabs, manual IBR calculations, manual remeasurement triggers — is viable for portfolios of up to approximately 10–15 leases. Beyond that, it becomes error-prone and auditor-intensive. The automation approach:
- Centralised lease register — All lease contracts ingested and key terms structured: commencement date, lease term, renewal options, IBR, payment schedule, escalation structure, lease type.
- Automated initial calculation — ROU asset and lease liability calculated at commencement from the structured data — no manual present value calculations.
- Automated journal generation — Monthly journal entries generated for each lease — interest component, principal reduction, depreciation — and routed for Finance review before posting to ERP.
- Remeasurement trigger monitoring — Escalation trigger dates, renewal decision dates, and lease modification events monitored automatically — remeasurement calculations prepared when triggered.
- Disclosure schedule generation — IFRS 16 / Ind AS 116 disclosure schedules — maturity analysis, sensitivity analysis, reconciliation of opening and closing lease liabilities — generated from the system for inclusion in financial statements.
Frequently Asked Questions
Q1: What is the difference between Ind AS 116 and Ind AS 17? Ind AS 17 (the predecessor standard) allowed lessees to classify leases as either finance leases (on balance sheet) or operating leases (off balance sheet). Most retail store leases were classified as operating leases under Ind AS 17. Ind AS 116 eliminates this distinction for lessees — almost all leases now appear on the balance sheet as a Right-of-Use asset and a corresponding lease liability.
Q2: What is a Right-of-Use asset under Ind AS 116? The Right-of-Use asset represents the lessee's right to use the leased asset over the lease term. It is recognised on the balance sheet at the commencement date, initially measured at the amount of the lease liability plus any prepaid rent and initial direct costs, and subsequently depreciated over the lease term.
Q3: What is the incremental borrowing rate (IBR) and how is it determined for Indian companies? The IBR is the rate of interest the lessee would have to pay to borrow funds over a similar term, with similar security, to obtain an asset of a similar value to the ROU asset. For Indian companies, it is typically based on the company's actual borrowing rates adjusted for term, currency (INR), and the nature of the leased asset. IBRs for Indian enterprise retail leases typically range from 8% to 12%.
Q4: How do CPI-linked rent escalations affect the Ind AS 116 calculation? Variable lease payments linked to an index or rate (including CPI) are included in the initial lease liability calculation using the index or rate applicable at the commencement date. When the escalation actually triggers and the rent increases, the lease liability is remeasured using a revised payment schedule and a revised discount rate.
Q5: Do short-term store licences in India fall under Ind AS 116? Leave and Licence Agreements of 12 months or less qualify for the short-term lease exemption under Ind AS 116 — payments are recognised as operating expenses rather than creating an ROU asset and lease liability. However, if the licence has renewal options that are reasonably certain to be exercised and the total assessed term exceeds 12 months, the short-term exemption does not apply.
Hubler's Lease AI Agent prepares Ind AS 116 and IFRS 16 calculations, routes them for Finance review, and posts approved journals directly to your ERP — with a complete audit trail on every entry.