Ind AS 17 vs Ind AS 116 – Leases Transition: The Complete Comparison

Why the Standard Changed

For decades, Ind AS 17 (like its predecessor IAS 17) allowed companies to classify leases as either "finance leases" (on balance sheet) or "operating leases" (off balance sheet). The result was a massive off-balance-sheet financing problem — global companies had trillions of dollars in lease obligations that simply did not appear on their balance sheets.

Investors, analysts, and credit rating agencies had to manually add back estimated operating lease obligations using multiples of annual lease payments. This "add-back" was approximate, inconsistent, and often inaccurate. Different analysts used 6x, 7x, or 8x annual rental multiples to estimate the "true" debt burden — leading to significant valuation discrepancies.

IASB and FASB jointly concluded that the finance vs operating lease distinction was being manipulated — companies structured leases to be just below the thresholds for finance lease classification, keeping obligations off the balance sheet. The new model (IFRS 16/Ind AS 116) largely eliminated this by requiring all leases above a minimum threshold to be recognised on the lessee's balance sheet.

The Fundamental Difference

The single most important difference between Ind AS 17 and Ind AS 116 is the lessee's accounting model:

How Ind AS 17 Worked (Old Standard)

Under Ind AS 17, the entire framework for lessee accounting depended on classifying each lease as a finance lease or an operating lease using five tests. If a lease "transferred substantially all the risks and rewards incidental to ownership" to the lessee, it was a finance lease. Otherwise, it was an operating lease.

The Five Bright-Line Tests Under Ind AS 17

Operating Lease Accounting Under Ind AS 17 (Lessee)

If a lease was classified as an operating lease, the lessee simply recognised:

• Rent expense on a straight-line basis over the lease term (even if payments varied)
• No asset on balance sheet
• No liability on balance sheet
• Only a footnote disclosure of future minimum lease payments in aggregate

Finance Lease Accounting Under Ind AS 17 (Lessee)

Finance leases were capitalised — similar to the current Ind AS 116 treatment:

• Asset recognised at lower of fair value or PV of minimum lease payments
• Corresponding lease liability at same amount
• Asset depreciated over useful life or lease term (whichever shorter)
• Lease payments split into interest (P&L) and principal repayment (reduces liability)

How Ind AS 116 Works (New Standard)

Under Ind AS 116, the lessee no longer needs to classify leases. All leases (above minimum thresholds) result in the recognition of a Right-of-Use (ROU) asset and a lease liability. This is essentially the old "finance lease" treatment applied to all leases.

Lease Definition Under Ind AS 116

Ind AS 116 also introduced a refined definition of a lease — a contract is a lease if it conveys the right to control the use of an identified asset for a period of time in exchange for consideration. This involves assessing:

• Is there an identified asset? (substantive substitution rights negate this)
• Does the customer have the right to obtain substantially all the economic benefits?
• Does the customer have the right to direct the use of the asset?

Initial Measurement of Lease Liability

At lease commencement, the lease liability is measured at the present value of future lease payments, discounted at the rate implicit in the lease (or the lessee's incremental borrowing rate if the implicit rate is not readily determinable).

Subsequent Measurement

• Lease liability: Increases by interest (unwinding of discount) and decreases by lease payments made
• ROU asset: Depreciated over the shorter of lease term or useful life of the asset (unless ownership transfers, then over useful life)

Finance vs Operating — The Classification That Defined an Era

Under Ind AS 17, companies often structured transactions specifically to achieve operating lease classification. Common techniques included:

Structured Finance Lease Avoidance

• Setting lease terms to be just under 75% of asset's economic life
• Pricing lease payments so PV is just under 90% of asset fair value
• Not including transfer of ownership or bargain purchase options
• Including a residual value guarantee by the lessor (reducing lessee's effective PV of payments)

Right-of-Use Asset — The New Approach

The ROU asset represents the lessee's right to use the underlying asset during the lease term. It is initially measured at the amount of the lease liability plus:

• Lease payments made at or before commencement
• Initial direct costs (legal fees, broker commissions)
• Estimated restoration costs (dismantling obligations — Ind AS 37)
• Less any lease incentives received from the lessor

Subsequent Measurement Options

An ROU asset can be measured using:

• Cost model: Cost less accumulated depreciation and impairment (most common)
• Revaluation model: Only if the underlying asset would qualify for revaluation under Ind AS 16
• Fair value model: Only if ROU asset is investment property and lessee uses Ind AS 40 fair value model

Transition Methods and Impact

Companies transitioning from Ind AS 17 to Ind AS 116 had two choices:

Method 1: Full Retrospective

Restate all prior periods as if Ind AS 116 had always applied. Comparative figures restated. Adjustment through retained earnings for cumulative effect at transition date.

Method 2: Modified Retrospective (Cumulative Catch-up)

Apply Ind AS 116 from April 1, 2019 without restating comparatives. The cumulative effect is adjusted in opening retained earnings as of April 1, 2019. This was the more commonly adopted approach by Indian companies due to practical complexity of retrospective restatement.

Financial Statement Impact Analysis

The shift from Ind AS 17 to Ind AS 116 had predictable — and in many cases dramatic — impacts on key financial metrics for lessees:

Balance Sheet Impact

• Assets increase: New ROU assets added (previously off balance sheet operating leases)
• Liabilities increase: Corresponding lease liabilities recognised
• Leverage ratios worsen: Debt-to-equity and debt-to-EBITDA ratios increase

P&L Impact

• EBITDA improves: Rent expense (EBITDA hit) replaced by depreciation + interest (below EBITDA) → EBITDA goes up
• EBIT may be similar: Depreciation replaces rent — roughly similar amounts in early years
• EBT (PBT) slightly lower: Interest expense added with no offset in early years of lease (back-loaded structure)
• Operating cash flow improves: Lease payments reclassified from "rent paid (operating CF)" to "principal repayment (financing CF)" + "interest paid (operating or financing CF)"

Practical Exemptions Under Ind AS 116

Ind AS 116 provides two important practical exemptions that reduce the burden of bringing all leases onto the balance sheet:

1. Short-Term Leases

Leases with a term of 12 months or less at commencement (including options) may be excluded from the full ROU asset / lease liability treatment. The lease payments are expensed on a straight-line basis. This is a policy choice by class of underlying asset (e.g., short-term IT equipment leases can be exempted while short-term vehicle leases are brought on balance sheet).

2. Low-Value Assets

Leases of low-value assets (assessed at underlying asset level, when new — typically IASB guidance suggests USD 5,000 per item as a benchmark) may also be expensed directly. Examples include laptops, tablets, small office furniture, and similar individually low-value items.

In India, ICAI has not prescribed a specific INR threshold — companies typically use the USD 5,000 equivalent (approximately ₹4 lakh per item) or define their own threshold in accounting policy, which must be disclosed and applied consistently.

Frequently Asked Questions