Introduction
Ind AS 116 compliance is complex, and even experienced finance teams make costly mistakes. Whether you are transitioning to the standard for the first time or managing an ongoing lease portfolio, certain errors appear with alarming regularity. Auditors flag them, stakeholders question them, and regulators penalise them.
In this article, we break down the five most common lease accounting errors we see across Indian enterprises and provide actionable strategies to prevent each one.
Warning: These errors can lead to material misstatements, audit qualifications, and regulatory scrutiny. Review your current processes against each point below.
Error 1: Using an Incorrect Discount Rate
The Mistake
Many companies apply a single, generic discount rate across all leases — often the corporate borrowing rate or a flat rate from treasury. Ind AS 116 requires the rate implicit in the lease when determinable, or the lessee's incremental borrowing rate (IBR) when it is not. The IBR must be specific to the lease term, currency, economic environment, and the credit standing of the lessee.
- Using the parent company's borrowing rate for a subsidiary's lease
- Ignoring the lease term when selecting the rate
- Failing to adjust for collateral (secured vs. unsecured)
- Not updating rates for new leases or modifications
The Fix: Build a documented IBR methodology. Consider using observable market rates (government securities, corporate bond yields) as a starting point, then adjust for credit risk, tenure, and jurisdiction. Maintain a rate matrix that is reviewed quarterly.
Error 2: Missing Lease Modifications
The Mistake
Lease terms change frequently — rent escalations, extensions, early terminations, scope changes. Many teams fail to capture these modifications in their lease accounting system, either because the information does not flow from the operations or legal team, or because the modification is considered immaterial and ignored.
- Extension options exercised but not recorded
- Rent renegotiations not reflected in the lease liability
- Partial terminations (e.g., giving back one floor) not processed
- Change in variable payment terms not reassessed
The Fix: Establish a formal lease modification workflow. Any change to a lease contract should trigger a review by the finance team. Implement automated alerts for key dates — option exercise deadlines, escalation dates, and renewal windows.
Error 3: Incomplete or Incorrect Disclosures
The Mistake
Ind AS 116 requires extensive quantitative and qualitative disclosures. Many companies provide incomplete maturity analyses, omit details about variable lease payments, or fail to disclose the nature of extension and termination options. Auditors increasingly scrutinise disclosure quality.
- Missing maturity analysis for undiscounted lease liabilities
- Not disclosing short-term and low-value lease expenses separately
- Omitting details about sale-and-leaseback transactions
- Inadequate description of significant judgements and estimates
The Fix: Use a disclosure checklist aligned with Ind AS 116 paragraphs 51-60. Better yet, use software that generates disclosure reports automatically from your lease data, ensuring nothing is missed.
Error 4: Manual Calculation Mistakes
The Mistake
Spreadsheet-based lease accounting is inherently risky. Formula errors, broken links, copy-paste mistakes, and version control issues lead to incorrect ROU asset and lease liability balances. A single formula error in a present value calculation can cascade across the entire amortisation schedule.
- Incorrect present value formulas (wrong compounding period)
- Depreciation calculated on wrong asset base
- Interest accrual timing errors (advance vs. arrears payments)
- Multiple versions of the same spreadsheet with conflicting numbers
The Fix: Eliminate spreadsheets for lease accounting. Purpose-built lease accounting software performs calculations deterministically with built-in validation. If you must use spreadsheets temporarily, implement rigorous controls — cell protection, independent reviews, and reconciliation checks.
Error 5: Poor Documentation and Audit Trail
The Mistake
When auditors ask "why was this rate chosen?" or "when was this modification recorded?", teams scramble to reconstruct the rationale. Without a proper audit trail, even correct accounting treatments can be questioned and flagged. Poor documentation also makes it difficult for new team members to understand historical decisions.
- No documented basis for discount rate selection
- Modification approvals not recorded or timestamped
- Lease contract changes not linked to accounting entries
- Transition-date assumptions undocumented
The Fix: Implement a maker-checker workflow where every change is logged with user, timestamp, and rationale. Maintain a complete audit trail from lease contract to journal entry. Store supporting documents (contracts, amendments, correspondence) alongside the accounting records.
Prevention Checklist
Use this checklist to audit your current lease accounting process:
- Documented incremental borrowing rate methodology with quarterly review
- Formal modification workflow with automated trigger alerts
- Disclosure checklist covering all Ind AS 116 requirements (paragraphs 51-60)
- Purpose-built software replacing spreadsheets for calculations
- Complete audit trail with maker-checker approval for all changes
- Regular internal review of lease data completeness and accuracy
- Training programme for finance team on Ind AS 116 updates
- Reconciliation between lease register and general ledger each period
Pro Tip: The best way to prevent these errors is to automate. Companies using dedicated lease accounting software report 90% fewer audit findings related to lease accounting compared to those using spreadsheets.