Ind AS 116 — Leases, converged with IFRS 16 — eliminated the distinction between operating and finance leases for lessees. Under the new standard, almost all leases must be brought on-balance-sheet as a Right-of-Use (ROU) asset and a corresponding Lease Liability. This has dramatically reshaped the balance sheets and income statements of asset-light businesses — retailers, airlines, hotels, logistics companies — and inflated their EBITDA while increasing reported debt. Effective 1 April 2019, it is one of the most impactful Ind AS standards for Indian listed companies.
Standard Reference: Ind AS 116 issued by MCA vide Companies (Indian Accounting Standards) (Amendment) Rules, 2019. Converged with IFRS 16 (effective 1 January 2019 globally). Mandatory for all Ind AS companies for annual periods beginning on or after 1 April 2019. Supersedes Ind AS 17.
Ind AS 116 applies to all leases, including subleases. Exclusions:
Lease definition: A contract (or part of a contract) that conveys the right to control the use of an identified asset for a period of time in exchange for consideration. The key test: does the customer have the right to obtain substantially all the economic benefits from use AND the right to direct the how and for what purpose the asset is used?
Under Ind AS 116, lessees recognise for virtually all leases:
At commencement date, the lease liability = present value of lease payments not yet made, discounted at the incremental borrowing rate (IBR) of the lessee (or the implicit rate in the lease if determinable).
Lease payments included in the liability:
Excluded from lease liability: Variable payments based on performance (revenue-linked rent, per-unit-sold rent), payments for non-lease components (service charges, insurance billed separately)
ROU Asset = Lease Liability + Lease payments made at or before commencement + Initial direct costs + Restoration/decommissioning provision − Lease incentives received
Each period: increase by interest (Lease Liability × IBR) and decrease by lease payments made.
The ROU asset is depreciated on a straight-line basis over the shorter of: lease term or useful life of the underlying asset (if ownership is expected to transfer or purchase option is certain to be exercised, use useful life).
Scenario: RetailCo has 500 stores, each with average lease of ₹8 lakh/month, average remaining lease term of 7 years. IBR: 8%.
Aggregate lease liability calculation:
| Parameter | Value |
|---|---|
| Monthly rent per store | ₹8,00,000 |
| Average remaining lease term | 84 months (7 years) |
| IBR | 8% per annum (0.667% per month) |
| PV factor (84 months @ 0.667%/month) | ~64.16 |
| Lease Liability per store | ₹8,00,000 × 64.16 = ₹5,13,28,000 |
| Total Lease Liability (500 stores) | ₹2,566 crore |
| ROU Asset recognised | ₹2,566 crore |
Financial statement impact (Year 1):
| Metric | Before Ind AS 116 | After Ind AS 116 | Change |
|---|---|---|---|
| Total Assets | ₹5,000 Cr | ₹7,566 Cr | +51% |
| Total Debt (Lease Liability) | ₹500 Cr | ₹3,066 Cr | +513% |
| Rent Expense | ₹480 Cr/yr | ₹0 | Eliminated |
| Depreciation (ROU) | ₹0 | ₹367 Cr/yr | +₹367 Cr |
| Finance Cost (Lease) | ₹0 | ₹205 Cr/yr | +₹205 Cr |
| EBITDA | ₹800 Cr | ₹1,280 Cr | +60% ↑ |
| EBIT (PAT not affected much) | ₹600 Cr | ₹913 Cr | +52% |
| Debt/Equity ratio | 0.5x | 3.0x | 6x increase |
Scenario: AirCo has a fleet of 150 Airbus A320 aircraft, each leased for 12 years at USD 450,000/month (₹3.75 crore/month at ₹83/$). IBR: 6.5% per annum.
Per Aircraft PV calculation:
| Item | Value |
|---|---|
| Monthly lease payment | ₹3.75 Cr |
| Lease term | 144 months (12 years) |
| Monthly IBR | 0.542% |
| PV of lease payments per aircraft | ~₹370 Cr |
| Total fleet Lease Liability (150 aircraft) | ~₹55,500 Cr |
IndiGo's actual balance sheet post-Ind AS 116: Lease Liabilities jumped from near-zero to approximately ₹25,000–28,000 crore, making it technically one of the most leveraged airlines on paper — despite being profitable operationally. This is entirely explained by Ind AS 116 accounting, not actual borrowing.
Income statement impact per aircraft, Year 1:
| Cost | Pre-Ind AS 116 | Post-Ind AS 116 |
|---|---|---|
| Lease/Aircraft rental expense | ₹45 Cr/yr | ₹0 (reclassified) |
| Depreciation — ROU Asset | ₹0 | ₹31 Cr/yr (₹370Cr ÷ 12yr) |
| Finance cost — lease interest | ₹0 | ₹24 Cr/yr (Year 1) |
| EBITDA per aircraft impact | Base | +₹45 Cr (rent removed) |
| PBT per aircraft impact | Base | ~−₹10 Cr (front-loaded interest) |
Two practical expedients allow lessees to avoid ROU/Liability recognition:
A lease modification is a change in scope or consideration that was not part of the original terms. Treatment depends on whether the modification effectively creates a new lease:
Ind AS 116 has created significant comparability issues that analysts and investors must adjust for:
| Ratio | Pre-Ind AS 116 Direction | Post-Ind AS 116 Direction | Why |
|---|---|---|---|
| EBITDA margin | Base | Inflated (rent removed from EBITDA) | Rent reclassified below EBITDA |
| EV/EBITDA | Base | Lower multiple (higher EBITDA, higher EV) | Both numerator and denominator change |
| Debt/Equity | Base | Significantly higher | Lease liability added as debt |
| Interest coverage | Base | May deteriorate (more finance cost) | Lease interest added to finance cost |
| Return on Assets | Base | Lower initially | ROU asset inflates total assets |
| PAT (Net profit) | Base | Slightly lower in early years | Front-loaded interest > straight-line rent |
Scenario: Tech Corp signs a 10-year office lease: ₹80 lakh/month starting Month 7 (first 6 months rent-free as lease incentive). Security deposit: ₹5 crore (refundable at end of lease).
Key Ind AS 116 adjustments:
| Item | Amount |
|---|---|
| Total undiscounted payments | 114 × ₹80L = ₹91.2 Cr |
| PV of lease payments (IBR 9%, 120 months) | ~₹62.4 Cr |
| ROU Asset = PV of liability | ₹62.4 Cr |
| Annual Depreciation (₹62.4 Cr ÷ 10 yr) | ₹6.24 Cr |
| Year 1 Finance cost (months 1-6 interest accrues on liability) | ~₹2.8 Cr |
| Year 1 Depreciation | ₹6.24 Cr |
| Total P&L charge Year 1 | ₹9.04 Cr (vs ₹0 rent in months 1-6) |
Lessor accounting under Ind AS 116 is substantially unchanged from Ind AS 17:
A lease is a finance lease if it transfers substantially all the risks and rewards of ownership — key indicators include: lease term covers major part of asset's life, PV of lease payments is substantially all of asset's fair value, transfer of ownership, bargain purchase option.
If an entity sells an asset and leases it back from the buyer:
Sale-and-leaseback is common in India for real estate (office buildings, factories), aircraft, and IT equipment. Post-Ind AS 116, the accounting for these arrangements is significantly more complex.
| Disclosure | Required Information |
|---|---|
| Maturity analysis | Undiscounted lease liability payments by year (1yr, 2-5yr, 5yr+) |
| Lease amounts in P&L | Depreciation of ROU, interest on lease liability, short-term/low-value expense, variable lease expense |
| Balance sheet | Carrying amount of ROU assets (by class); opening and closing lease liabilities |
| Cash flow | Principal repayments (financing activities); interest paid (financing or operating); short-term/low-value/variable payments (operating) |
| Significant judgements | Lease term determination (renewal options), IBR determination, variable payment estimation |
Under Ind AS 116, operating lease rent expense is replaced by (1) depreciation of ROU asset and (2) interest on lease liability. Since depreciation and interest sit below the EBITDA line, EBITDA improves mechanically — even though the underlying economics are identical. For example, if a retailer previously had ₹100 Cr rent expense (which reduced EBITDA), under Ind AS 116 the same rent is split into ₹70 Cr depreciation and ₹35 Cr interest — both excluded from EBITDA. EBITDA inflates by ₹100 Cr. Analysts use 'EBITDA-L' (EBITDA after Leases) or 'Adjusted EBITDA' to restore comparability. The EBITDA multiple is not comparable across pre- and post-Ind AS 116 periods without this adjustment.
The lease liability is discounted at the rate implicit in the lease (if readily determinable) — i.e., the rate that makes the PV of lease payments equal to the fair value of the underlying asset. If the implicit rate cannot be readily determined (which is very common for operating property leases), the lessee uses its Incremental Borrowing Rate (IBR) — the rate at which the lessee would borrow a similar amount, in a similar currency, for a similar term, with similar collateral in the same economic environment. In India, the IBR is typically derived from the lessee's existing borrowing rates, government bond yields adjusted for credit spread, or other observable rates. The IBR is re-assessed when there is a lease modification or change in lease term.
No. Variable lease payments based on sales, revenue, usage, or performance are NOT included in the lease liability at commencement. Only variable payments that depend on an index or rate (e.g., CPI-linked escalations, base lending rate-linked rents) are included — using the index/rate at commencement date. Revenue-linked rents ('turnover rent') are expensed in the period in which they arise, as they don't create a predictable future obligation. This is significant for retail lessees: if a portion of rent is fixed and a portion is linked to store revenue, only the fixed portion enters the lease liability.
Ind AS 116 — Leases, converged with IFRS 16 — eliminated the distinction between operating and finance leases for lessees. Under the new standard, almost all leases must be brought on-balance-sheet as a Right-of-Use (ROU) asset and a corresponding Lease Liability. This has dramatically reshaped the balance sheets and income statements of asset-light businesses — retailers, airlines, hotels, logistics companies — and inflated their EBITDA while increasing reported debt. Effective 1 April 2019, it is one of the most impactful Ind AS standards for Indian listed companies.
Standard Reference: Ind AS 116 issued by MCA vide Companies (Indian Accounting Standards) (Amendment) Rules, 2019. Converged with IFRS 16 (effective 1 January 2019 globally). Mandatory for all Ind AS companies for annual periods beginning on or after 1 April 2019. Supersedes Ind AS 17.
Ind AS 116 applies to all leases, including subleases. Exclusions:
Lease definition: A contract (or part of a contract) that conveys the right to control the use of an identified asset for a period of time in exchange for consideration. The key test: does the customer have the right to obtain substantially all the economic benefits from use AND the right to direct the how and for what purpose the asset is used?
Under Ind AS 116, lessees recognise for virtually all leases:
At commencement date, the lease liability = present value of lease payments not yet made, discounted at the incremental borrowing rate (IBR) of the lessee (or the implicit rate in the lease if determinable).
Lease payments included in the liability:
Excluded from lease liability: Variable payments based on performance (revenue-linked rent, per-unit-sold rent), payments for non-lease components (service charges, insurance billed separately)
ROU Asset = Lease Liability + Lease payments made at or before commencement + Initial direct costs + Restoration/decommissioning provision − Lease incentives received
Each period: increase by interest (Lease Liability × IBR) and decrease by lease payments made.
The ROU asset is depreciated on a straight-line basis over the shorter of: lease term or useful life of the underlying asset (if ownership is expected to transfer or purchase option is certain to be exercised, use useful life).
Scenario: RetailCo has 500 stores, each with average lease of ₹8 lakh/month, average remaining lease term of 7 years. IBR: 8%.
Aggregate lease liability calculation:
| Parameter | Value |
|---|---|
| Monthly rent per store | ₹8,00,000 |
| Average remaining lease term | 84 months (7 years) |
| IBR | 8% per annum (0.667% per month) |
| PV factor (84 months @ 0.667%/month) | ~64.16 |
| Lease Liability per store | ₹8,00,000 × 64.16 = ₹5,13,28,000 |
| Total Lease Liability (500 stores) | ₹2,566 crore |
| ROU Asset recognised | ₹2,566 crore |
Financial statement impact (Year 1):
| Metric | Before Ind AS 116 | After Ind AS 116 | Change |
|---|---|---|---|
| Total Assets | ₹5,000 Cr | ₹7,566 Cr | +51% |
| Total Debt (Lease Liability) | ₹500 Cr | ₹3,066 Cr | +513% |
| Rent Expense | ₹480 Cr/yr | ₹0 | Eliminated |
| Depreciation (ROU) | ₹0 | ₹367 Cr/yr | +₹367 Cr |
| Finance Cost (Lease) | ₹0 | ₹205 Cr/yr | +₹205 Cr |
| EBITDA | ₹800 Cr | ₹1,280 Cr | +60% ↑ |
| EBIT (PAT not affected much) | ₹600 Cr | ₹913 Cr | +52% |
| Debt/Equity ratio | 0.5x | 3.0x | 6x increase |
Scenario: AirCo has a fleet of 150 Airbus A320 aircraft, each leased for 12 years at USD 450,000/month (₹3.75 crore/month at ₹83/$). IBR: 6.5% per annum.
Per Aircraft PV calculation:
| Item | Value |
|---|---|
| Monthly lease payment | ₹3.75 Cr |
| Lease term | 144 months (12 years) |
| Monthly IBR | 0.542% |
| PV of lease payments per aircraft | ~₹370 Cr |
| Total fleet Lease Liability (150 aircraft) | ~₹55,500 Cr |
IndiGo's actual balance sheet post-Ind AS 116: Lease Liabilities jumped from near-zero to approximately ₹25,000–28,000 crore, making it technically one of the most leveraged airlines on paper — despite being profitable operationally. This is entirely explained by Ind AS 116 accounting, not actual borrowing.
Income statement impact per aircraft, Year 1:
| Cost | Pre-Ind AS 116 | Post-Ind AS 116 |
|---|---|---|
| Lease/Aircraft rental expense | ₹45 Cr/yr | ₹0 (reclassified) |
| Depreciation — ROU Asset | ₹0 | ₹31 Cr/yr (₹370Cr ÷ 12yr) |
| Finance cost — lease interest | ₹0 | ₹24 Cr/yr (Year 1) |
| EBITDA per aircraft impact | Base | +₹45 Cr (rent removed) |
| PBT per aircraft impact | Base | ~−₹10 Cr (front-loaded interest) |
Two practical expedients allow lessees to avoid ROU/Liability recognition:
A lease modification is a change in scope or consideration that was not part of the original terms. Treatment depends on whether the modification effectively creates a new lease:
Ind AS 116 has created significant comparability issues that analysts and investors must adjust for:
| Ratio | Pre-Ind AS 116 Direction | Post-Ind AS 116 Direction | Why |
|---|---|---|---|
| EBITDA margin | Base | Inflated (rent removed from EBITDA) | Rent reclassified below EBITDA |
| EV/EBITDA | Base | Lower multiple (higher EBITDA, higher EV) | Both numerator and denominator change |
| Debt/Equity | Base | Significantly higher | Lease liability added as debt |
| Interest coverage | Base | May deteriorate (more finance cost) | Lease interest added to finance cost |
| Return on Assets | Base | Lower initially | ROU asset inflates total assets |
| PAT (Net profit) | Base | Slightly lower in early years | Front-loaded interest > straight-line rent |
Scenario: Tech Corp signs a 10-year office lease: ₹80 lakh/month starting Month 7 (first 6 months rent-free as lease incentive). Security deposit: ₹5 crore (refundable at end of lease).
Key Ind AS 116 adjustments:
| Item | Amount |
|---|---|
| Total undiscounted payments | 114 × ₹80L = ₹91.2 Cr |
| PV of lease payments (IBR 9%, 120 months) | ~₹62.4 Cr |
| ROU Asset = PV of liability | ₹62.4 Cr |
| Annual Depreciation (₹62.4 Cr ÷ 10 yr) | ₹6.24 Cr |
| Year 1 Finance cost (months 1-6 interest accrues on liability) | ~₹2.8 Cr |
| Year 1 Depreciation | ₹6.24 Cr |
| Total P&L charge Year 1 | ₹9.04 Cr (vs ₹0 rent in months 1-6) |
Lessor accounting under Ind AS 116 is substantially unchanged from Ind AS 17:
A lease is a finance lease if it transfers substantially all the risks and rewards of ownership — key indicators include: lease term covers major part of asset's life, PV of lease payments is substantially all of asset's fair value, transfer of ownership, bargain purchase option.
If an entity sells an asset and leases it back from the buyer:
Sale-and-leaseback is common in India for real estate (office buildings, factories), aircraft, and IT equipment. Post-Ind AS 116, the accounting for these arrangements is significantly more complex.
| Disclosure | Required Information |
|---|---|
| Maturity analysis | Undiscounted lease liability payments by year (1yr, 2-5yr, 5yr+) |
| Lease amounts in P&L | Depreciation of ROU, interest on lease liability, short-term/low-value expense, variable lease expense |
| Balance sheet | Carrying amount of ROU assets (by class); opening and closing lease liabilities |
| Cash flow | Principal repayments (financing activities); interest paid (financing or operating); short-term/low-value/variable payments (operating) |
| Significant judgements | Lease term determination (renewal options), IBR determination, variable payment estimation |
Under Ind AS 116, operating lease rent expense is replaced by (1) depreciation of ROU asset and (2) interest on lease liability. Since depreciation and interest sit below the EBITDA line, EBITDA improves mechanically — even though the underlying economics are identical. For example, if a retailer previously had ₹100 Cr rent expense (which reduced EBITDA), under Ind AS 116 the same rent is split into ₹70 Cr depreciation and ₹35 Cr interest — both excluded from EBITDA. EBITDA inflates by ₹100 Cr. Analysts use 'EBITDA-L' (EBITDA after Leases) or 'Adjusted EBITDA' to restore comparability. The EBITDA multiple is not comparable across pre- and post-Ind AS 116 periods without this adjustment.
The lease liability is discounted at the rate implicit in the lease (if readily determinable) — i.e., the rate that makes the PV of lease payments equal to the fair value of the underlying asset. If the implicit rate cannot be readily determined (which is very common for operating property leases), the lessee uses its Incremental Borrowing Rate (IBR) — the rate at which the lessee would borrow a similar amount, in a similar currency, for a similar term, with similar collateral in the same economic environment. In India, the IBR is typically derived from the lessee's existing borrowing rates, government bond yields adjusted for credit spread, or other observable rates. The IBR is re-assessed when there is a lease modification or change in lease term.
No. Variable lease payments based on sales, revenue, usage, or performance are NOT included in the lease liability at commencement. Only variable payments that depend on an index or rate (e.g., CPI-linked escalations, base lending rate-linked rents) are included — using the index/rate at commencement date. Revenue-linked rents ('turnover rent') are expensed in the period in which they arise, as they don't create a predictable future obligation. This is significant for retail lessees: if a portion of rent is fixed and a portion is linked to store revenue, only the fixed portion enters the lease liability.