Guidelines on Ind-AS 116: Leases applicable from 01.04.

2019

MCA has notified Ind-AS 116: Leases vide notification dated 30.03.2019 which shall be implemented
w.e.f. April 1st, 2019. Compared to previous Standard (Ind-AS 17) on leases which shall be omitted w.e.f.
April 1, 2019, principles of Ind-AS 116 for classification and recognition of leases are substantially the
same. However, apart from the additional disclosure requirements, there is significant change in the
way the operating leases shall be accounted for in the books of lessee.

All leases taken as lessee, except leases for short-term and leases of low value assets, shall be
recognised in the financial statements as an asset (Right-of-Use asset) and a corresponding lease liability
(as borrowings) by discounting the lease payments over the lease term.

• The lease liability shall be measured at the present value of all the lease payments due over the
lease term.

• The right-of-use asset (ROU) shall be measured at cost that comprises of initial value of lease
liability, lease payments made on or before the commencement of lease, initial direct costs
incurred and an initial estimated cost of dismantling & removing the leased asset and restoring
the site on which the asset is located.

Subsequently, at each balance sheet date, the right-of-use asset shall be depreciated and lease liability
shall be increased by interest amount & decreased by amount paid.

Divisions are required to follow the principles of Ind-AS 116 while recognising and accounting for leases
and also follow the following guidelines:

[I] - GENERAL GUIDELINES

• All divisions to assign lease code to all the leases which may be the combination of division/
location name and lease number.

• In case of composite contracts, the lease and non-lease components needs to be segregated
(unless impracticable) as per relative standalone prices and only lease component needs to be
discounted. If segregation of contract is impracticable, the entire component will be treated as
lease component and shall be discounted accordingly.
 • Discount rate to be used shall be the rate implicit in the lease. If it is impracticable to determine
the implicit rate, IOCL incremental borrowing rate for the quarter earlier to the quarter in which
the lease is entered is to be used. IOCL incremental borrowing rate (AAA rated bonds) is
provided in the treasury guidelines every quarter.

• For lease terms more than 15 years, 15 years rate of AAA bonds shall be used for discounting of
lease payments.

• Short term leases and leases of low value items need not to be discounted and shall be
accounted as done currently i.e. recognising rental expenses every year in the statement of
Profit and Loss.

• Short term leases: Leases having the lease term of 12 months or less at the
commencement date.

• Low value items: Leases where the annual lease payment is upto Rs 1 lakh. For this
purpose, divisions should take the original lease payment at the inception of the
contract i.e. without escalation during the term of the contract.

However, since the exemption available in Ind-AS 17 for general inflation is not available in Ind-
AS 116, the lease rentals shall be recognised as an expense on straight-line basis over the lease
term unless another systematic basis is more representative of the pattern of the benefit
derived from the asset.

[II] - TRANSITION GUIDELINES

• Where IOCL is a lessee

• The standard is applicable for annual reporting periods beginning on or after 1st April, 2019.
Therefore, for IOCL, the transition date or the date of initial application shall be 1st April, 2019.

• As a practical expedient, divisions are not required to reassess whether a contract is, or
contains, a lease at the date of initial application i.e. the contracts classified as leases as on 31 st
March 2019 as per Ind-AS 17 shall only be treated as leases under Ind-AS 116. However, new
contracts entered on or after 01.04.2019 shall be classified as leases as per the provisions of Ind-
AS 116.
 • Lease liability at the date of initial application for previously classified as an operating lease shall
be the lease liability measured at the present value of the remaining lease payments discounted
IOCL incremental borrowing rate at 1st April, 2019 (attached as Annexure-I) for balance period of
lease.

• Right of Use Asset at the date of initial application for previously classified as an operating lease
shall be equal to the lease liability (determined as above), adjusted by the amount of any
prepaid or accrued lease payments relating to that lease recognised in the balance sheet
immediately before the date of initial application.

• Leases for which the lease term ends within 12 months of the date of initial application need not
to be discounted and shall continue to be treated as it is.

• For leases classified as finance leases as on 31.03.2019, the carrying amount of the right-of-use
asset and the lease liability at the date of initial application shall be the carrying amount of the
lease asset and lease liability as on 31.03.2019. Subsequently, the accounting shall be governed
by new standard.

• For leases entered in Q1 2019-20, IOCL incremental borrowing rate as on 01.04.2019 is to be

used, if the rate implicit in the lease cannot be determined.

• Where IOCL is a lessor - No adjustment for transition, except for:-

Cases of sublease transactions classified as operating leases as per Ind-AS 17 but are finance leases
applying the principles of Ind-AS 116 – to be accounted for the sublease as a new finance lease entered
into at the date of initial application.

[III] - SPECIFIC GUIDELINES/ POINTS

• Determining lease term and non-cancellable leases:

• In determining the lease term and assessing the length of the non-cancellable period of
a lease, an entity shall apply the definition of a contract and determine the period for
which the contract is enforceable. A lease is no longer enforceable when the lessee and
the lessor each has the right to terminate the lease without permission from the other
 party with no more than an insignificant penalty (Refer Para B34 to Para B41 of Ind-AS
116).

• Leases where as per the agreement both parties have the option to cancel the lease
without other party’s permission and also without any significant penalty shall be
considered as cancellable leases else they will be considered as non-cancellable leases.

• While determining the lease term, option to renew the lease is also to be considered. If
the lease is renewable on discretion of IOCL (as a lessee) and IOCL is reasonably certain
to exercise the option at inception based on past experiences, renewal period should
also be taken.

• Divisions to consider/ evaluate the lease term based on the options/ terms of the lease
agreements.

• Cases where lease agreements is expired or any other case where lease term is not
ascertainable, they can be considered as a short term lease since the period is
unascertainable.

• For assets taken on leases used in the construction of other assets – finance cost and
depreciation will be capitalised in CWIP.

[IV] – ACCOUNTING AND PRESENTATION

• As per Ind AS 116, since the ROU asset needs to be accounted as per Ind AS 16 and Depreciation
needs to be charged, ROU asset will be treated as part of Tangible Assets till any other guidance
is released by ICAI on this point.

• ROU Asset shall be presented as a new line item in Note-2 as “ROU Asset”.

• Following New GL’s are required to be opened (Total 7 new GLs):

• One new GL in Tangible Assets (Gross Block).

• One new GL in Tangible Assets (Accumulated Depreciation).

• One new GL in Depreciation expenses.

 • One new GL in Rent expenses.

• One new GL in Finance Cost.

• Two new GL’s in Finance Lease Obligation (Current and Non-Current).

• Finance lease obligation in Note-16: Long Term Borrowings shall be renamed as “Lease
Obligations”.

• For June 2019 quarter, the entries will not be routed thru asset module and FI entries will be
passed to give effect to new accounting.

• For the purpose routing thru asset module from Q2 onwards, a new account determination will
be opened in asset module with new subclasses for each type of asset (like Plant and
Equipment, Furniture, Transport Equipment, etc.) under this account determination.

• Discounting/Computation template circulated earlier to all divisions is also attached for

reference.