Ind AS 116 Leases fundamentally changed the accounting landscape for corporate lessees by eliminating the distinction between operating and finance leases. Virtually all lease commitments must now be recognized on the balance sheet as Right-of-Use (ROU) Assets and Lease Liabilities.
1. Measuring the Lease Liability & Discount Rate
The initial lease liability equals the present value of future lease payments discounted using the lessee’s incremental borrowing rate (IBR). Variable lease payments linked to indices, lease renewal options, and termination penalties must be factored into the measurement model.
2. Income Statement Impact: EBITDA vs. Net Profit
Replacing straight-line operating rent expense with depreciation on ROU assets and interest expense on lease liabilities increases reported EBITDA, while creating a front-loaded total expense pattern over the lease term.
Short-Term & Low-Value Exemptions
Ind AS 116 permits optional exemptions for leases with a term of 12 months or less, and leases for low-value assets. Entities must maintain formal documentation supporting exemption claims.
Key Takeaway for Business Leaders
Proactive compliance and structured financial governance mitigate legal penalties, optimize tax liabilities, and protect corporate enterprise value.
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