Ind AS 116: Leases — ROU Asset, Lease Liability & Impact on EBITDA with Case Studies

Updated analysis for Tax Year 2026-27: Ind AS 116 Lease Accounting: Liability, ROU Asset and Three-Year Example

Added and reviewed on 9 October 2026. This section adds worked examples and current-year controls to the guide above; where the two differ, follow the statute and the latest notification.

Identify a lease before building the schedule

A contract contains a lease when it conveys the right to control the use of an identified asset for a period in exchange for consideration. Determine whether a supplier has a substantive substitution right, who obtains the economic benefits and who directs the asset’s use. A dedicated floor in a building, leased data-centre equipment or a vehicle fleet arrangement can be different from a mere service promise. Lease accounting begins with analysis of the contract, associated schedules and practical ability to direct use. A label saying licence, service agreement or monthly facility charge does not by itself decide whether Ind AS 116 applies. Keep the signed contract and modification history tied to every lease ID.

Determine term, enforceability and payments

The non-cancellable period is adjusted for renewal or termination options when exercise or non-exercise is reasonably certain, considering real economic incentives. Construction-specific fittings, penalties, relocation costs and strategic locations can influence the decision. Payments may include fixed amounts, in-substance fixed amounts, amounts based on an index or rate, specified purchase/termination amounts and certain residual-value guarantees. Pure variable usage charges generally follow a different recognition approach unless in substance fixed. Separate non-lease components where allocation is required or an elected practical expedient applies. Document the basis for the incremental borrowing rate where an implicit rate cannot readily be determined; a corporate headline borrowing rate may not fit the lease term and security.

Initial measurement: why the two numbers may differ

At commencement the liability ordinarily equals the present value of remaining relevant lease payments. The ROU asset begins with that liability and adjusts for payments made at or before commencement, less incentives, plus initial direct costs and relevant restoration costs. A refundable security deposit should be separately assessed as a financial asset, potentially at a discounted fair value under Ind AS 109, rather than automatically added to the lease liability. For short-term leases and leases of low-value underlying assets, a lessee may elect permitted exemptions and expense relevant payments under the chosen policy. The designation of low value refers to the underlying asset characteristics, not simply a small monthly instalment.

Worked example: three end-of-year rentals

Suppose an office lease has three annual payments of ₹12 lakh at each year end, and a 10% annual discount rate. With no upfront payments, incentives, initial direct costs or restoration liability, opening lease liability is ₹12 lakh × [1/1.10 + 1/1.10² + 1/1.10³], or approximately ₹29.84 lakh. Year-one finance cost is about ₹2.98 lakh. After a ₹12 lakh lease payment, liability closes near ₹20.82 lakh; year two begins with interest on that outstanding balance. If the ROU asset is depreciated straight line over a three-year lease term with no residual value and no ownership transfer, illustrative annual depreciation is ₹9.95 lakh. Different assumptions, payment timing or taxes change these outcomes.

Journal entries and finance KPI consequences

On commencement debit ROU asset and credit lease liability for the initial amounts, reflecting any separately recognised adjustments. Later recognise finance costs on the liability, reduce principal by cash paid and depreciate the ROU asset. Lease payments in cash flows are classified consistently under the relevant cash-flow standard, taking account of principal and interest components. Compared with an expense-only operating lease depiction, EBITDA usually rises for lessee arrangements brought on balance sheet; depreciation and finance cost replace much of the old rental expense. However, total cash paid does not change. Covenant calculations, return-on-assets, operating cash flows and debt-like obligations must be assessed under the actual lending definition, not merely a published ratio.

Remeasurement, modification and variable rents

An extension option becoming reasonably certain may change the lease term and require remeasurement with an appropriate revised discount rate. A change in payments because of an index may require remeasurement under the standard’s particular rules, not always a brand-new discount rate. A modification increasing scope or consideration may constitute a separate lease if the criteria are met. Landlord rent concessions, early exit, reassignment of space and impairment of the underlying ROU asset have different accounting consequences. Do not treat each monthly rent revision as a simple adjustment to the rent ledger. Preserve the effective modification date, signed addendum, recalculated liability bridge and corresponding ROU asset entry.

Designing a robust lease schedule

A reliable lease register stores contract commencement date, monthly or annual frequency, payment timing, escalations, index mechanism, currency, discount rate, term options, component allocation, tax treatment, asset class and management judgments. The computation schedule should show each payment date, gross cash flow, present-value factor, finance cost, principal repayment and closing liability, with a zero or appropriately accounted remaining balance at maturity. Reconcile schedule totals to the GL by lease class and location. Run sanity checks for inappropriate negative principal, mismatched currencies, missing modification events and periods of zero-rent. The approved disclosure should include maturity and cash-flow information required by the standard, alongside the accounting policy and significant judgments.

Practitioner checklist

• Assess identified-asset and right-to-control criteria.
• Document lease term options and discount-rate evidence.
• Reconcile opening ROU and liability including adjustments.
• Check each schedule period and modification bridge.
• Review balance-sheet, P&L and cash-flow disclosures.

Questions readers ask

Can a lease liability equal all future undiscounted rent?

Normally no. Relevant lease payments are discounted at the applicable rate.

What if rent is paid at the start of each year?

It changes the initial PV and accounting for amounts paid before commencement.

Do all leases need an ROU asset?

Review permitted short-term and low-value exemptions and relevant elections.

What happens to EBITDA?

Capitalised lease expense patterns often change EBITDA even when the actual rent cash flow does not.

Which discount rate should be used?

Use rate implicit in the lease when readily determinable; otherwise evaluate the incremental borrowing rate.

Is a landlord deposit part of the lease liability?

Evaluate deposits under their own financial-instrument accounting, not as automatic fixed-rent payments.

Official sources for this update

• ICAI - Educational Material on Ind AS 116, Leases
• ICAI - Compendium of Indian Accounting Standards (2025-2026)

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