Lease accounting

Here’s a complete, clear breakdown of Lease Accounting under modern standards (IFRS 16, ASC 842, and Ind AS 116):

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📘 What Is Lease Accounting?

Lease accounting is the process of recording leases of assets in the financial statements. It impacts both the balance sheet and income statement and applies to both lessees (users of the asset) and lessors (owners of the asset).

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🔁 New Lease Accounting Standards

Standard	Region	Applies to
IFRS 16	Global (IFRS countries)	Lessee & Lessor
ASC 842	United States (GAAP)	Lessee & Lessor
Ind AS 116	India	Lessee & Lessor

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🧾 1. Lessee Accounting

▶️ Initial Recognition (for long-term leases)

The lessee recognizes:

• Right-of-Use (ROU) Asset

• Lease Liability

Journal Entry:

Right-of-Use Asset A/c .......... Dr
     To Lease Liability A/c

• Lease Liability = Present Value (PV) of lease payments

• ROU Asset = Lease liability + initial direct costs

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⏳ Subsequent Recognition

Item	Entry
Depreciation of ROU Asset	Straight-line over lease term
Interest on Lease Liability	Based on amortized cost

Monthly Journal Entry:

Depreciation Expense A/c .......... Dr
     To ROU Asset A/c

Interest Expense A/c .............. Dr
Lease Liability A/c ............... Dr
     To Bank / Cash A/c

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✅ Exemptions Available (IFRS 16 / Ind AS 116)

Lease Type	Treatment
Short-term leases (≤12 months)	Expense directly
Low-value assets (e.g., printers, laptops)	Expense directly

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🧑‍💼 2. Lessor Accounting

The lessor classifies the lease as:

🔸 Finance Lease

• Transfers substantially all risks and rewards of ownership

• Derecognizes the asset

• Recognizes a lease receivable

Journal Entry:

Lease Receivable A/c .............. Dr
     To Asset A/c

Then, recognizes interest income over the lease term.

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🔹 Operating Lease

• Asset remains on lessor’s balance sheet

• Recognizes lease income straight-line over lease term

Journal Entry (monthly):

Bank / Receivable A/c .......... Dr
     To Lease Income A/c

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📊 Financial Statement Impact – Lessee

Statement	Impact
Balance Sheet	+ROU Asset, +Lease Liability
Income Statement	+Depreciation, +Interest (instead of rent)
Cash Flow Statement	Split:
→ Interest = Operating Activities
→ Principal = Financing Activities

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📌 Important Terms

Term	Meaning
Lease Term	Non-cancellable period + renewal periods (if reasonably certain)
Incremental Borrowing Rate (IBR)	Rate lessee would pay to borrow for similar asset
Variable Lease Payments	Based on usage or performance; may not be included in liability

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🧠 Example – Lessee Side

Let’s say:

• Annual lease payment: ₹1,00,000

• Lease term: 3 years

• Discount rate: 10%

• No upfront cost

At commencement:

ROU Asset A/c ............. Dr ₹2,49,000  
     To Lease Liability A/c ........ ₹2,49,000

Then depreciate ROU asset over 3 years and reduce lease liability via payments.

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📝 Summary Table

Aspect	Lessee	Lessor (Operating)	Lessor (Finance)
Asset	ROU Asset	Kept	Derecognized
Liability	Lease Liability	None	Lease Receivable
Income	Depreciation + Interest	Rental Income	Interest Income