Table of Contents
What Is Ind AS 116?
Ind AS 116, Leases, is the Indian Accounting Standard converged from IFRS 16. It fundamentally changed the way lessees report operating leases by requiring virtually all leases to appear on the balance sheet. Before Ind AS 116, operating leases were treated as simple expense items disclosed only in notes. Now, companies must recognise a Right-of-Use (ROU) asset and a corresponding lease liability for every qualifying lease.
The standard was notified by the Ministry of Corporate Affairs (MCA) and became mandatory for accounting periods beginning on or after 1 April 2019. Its goal is to provide a faithful representation of lease transactions, improve comparability across companies, and close a long-standing gap in financial reporting transparency.
Key Principle: Ind AS 116 eliminates the distinction between operating and finance leases for lessees. All leases with a term greater than 12 months and above the low-value threshold must be capitalised on the balance sheet.
Who Must Comply?
Ind AS 116 applies to all companies required to follow Indian Accounting Standards (Ind AS). The applicability is determined by the MCA roadmap based on company size and listing status:
- Listed companies — All listed entities and their subsidiaries, associates, and joint ventures must comply.
- Unlisted companies with a net worth of ₹250 crores or more — These fall under Phase II of the MCA roadmap and must follow Ind AS, including Ind AS 116.
- NBFCs — Non-Banking Financial Companies with asset size above ₹500 crores are also covered.
- Banks and insurance companies — Scheduled commercial banks and insurance companies follow Ind AS and must comply.
Note: Even if your company is not mandatorily covered, voluntary adoption of Ind AS is permitted. Many companies choose early adoption to align with global reporting standards and attract international investors.
Key Requirements
Ind AS 116 imposes several critical requirements on lessees. Understanding these is essential for accurate compliance:
Identify the Lease
Determine whether a contract is, or contains, a lease. A lease exists when a contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration.
Measure the Lease Liability
At the commencement date, measure the lease liability at the present value of lease payments not yet paid. This includes fixed payments, variable payments linked to an index, purchase option amounts, and termination penalties where applicable.
Recognise the Right-of-Use Asset
The ROU asset equals the initial lease liability, plus any lease payments made at or before commencement, plus initial direct costs, less any incentives received. It also includes an estimate of dismantling or restoration costs.
Subsequent Measurement
After initial recognition, depreciate the ROU asset over the shorter of the lease term or the useful life. Accrete interest on the lease liability using the incremental borrowing rate. Update for any modifications, reassessments, or remeasurements.
Prepare Disclosures
Provide comprehensive quantitative and qualitative disclosures including maturity analysis, expense breakdowns, cash flow information, and details of extension and termination options exercised.
Transition Approaches
Companies transitioning to Ind AS 116 can choose between two approaches. Each has different implications for the balance sheet and retained earnings:
| Aspect | Full Retrospective | Modified Retrospective |
|---|---|---|
| Comparative periods | Restated | Not restated |
| Retained earnings impact | Adjusted at earliest period presented | Adjusted at date of initial application |
| Complexity | Higher — requires full recalculation | Lower — practical expedients available |
| Common choice | Less common | Most companies choose this |
| Practical expedients | Limited | Several available (e.g., single discount rate for portfolio) |
Tip: Most Indian companies have adopted the modified retrospective approach because it avoids restating comparatives and allows several practical expedients that simplify the transition significantly.
- Identify all lease contracts across the organisation
- Gather lease data — start dates, terms, payments, options, escalation clauses
- Determine incremental borrowing rates for each lease
- Choose transition approach (full vs. modified retrospective)
- Calculate ROU assets and lease liabilities at transition date
- Set up ongoing depreciation and interest schedules
- Prepare required disclosures for the first reporting period
- Implement controls for ongoing lease accounting
How ZapLease Helps
Managing Ind AS 116 compliance manually with spreadsheets is error-prone, time-consuming, and difficult to audit. ZapLease automates the entire lifecycle from lease identification to disclosure generation, ensuring consistent and accurate compliance.
AI Document Import
Upload lease contracts in any format. Our AI extracts key terms — dates, payments, escalations, options — in seconds, eliminating manual data entry.
Automated Calculations
ROU assets, lease liabilities, depreciation schedules, and interest accruals calculated automatically with full audit trail.
Modification Handling
All four Ind AS 116 modification scenarios handled with correct P&L treatment and journal entries generated automatically.
Disclosure Reports
One-click generation of all required quantitative and qualitative disclosures, maturity analyses, and reconciliation tables.