Lease Accounting (Ind AS 116)
Ind AS 116 requires lessees to recognise a right-of-use (ROU) asset and a corresponding lease liability on the balance sheet for virtually all leases, replacing the former operating lease treatment where lease costs were simply expensed as incurred.
Ind AS 116, effective from April 2019, was one of the most impactful accounting standard changes for Indian companies with significant lease portfolios — retailers, airlines, hospitals, and hotel chains. Previously, operating leases (the dominant lease type in India) did not appear on the balance sheet; only finance leases were capitalised. This understated leverage and inflated capital efficiency metrics.
Post Ind AS 116, even operating leases require balance sheet recognition. The lessee records: (a) a right-of-use (ROU) asset representing the right to use the underlying asset for the lease term, measured at the present value of future lease payments plus initial direct costs; and (b) a lease liability equal to the present value of future lease payments, discounted at the lessee's incremental borrowing rate when the implicit rate is not readily determinable.
The income statement impact shifts from a single rent expense line to: (a) depreciation of the ROU asset (charged to operating expenses, typically on a straight-line basis), and (b) interest expense on the lease liability (charged to finance costs, front-loaded as the liability is higher in earlier periods). This changes EBIT and EBITDA. EBITDA specifically improves because rent expense (which was below EBITDA) is replaced by depreciation (added back in EBITDA) and interest (also added back in EBITDA). This mechanical EBITDA improvement does not represent genuine operational improvement — analysts adjusted EBITDA comparisons across the pre- and post-Ind AS 116 periods.
For Indian airlines — IndiGo (InterGlobe Aviation), SpiceJet — aircraft leases were the single largest expense category. Upon Ind AS 116 adoption, IndiGo's total assets and total debt both increased by tens of thousands of crore rupees, dramatically changing debt-to-equity ratios. Similarly, large retailers like Reliance Retail and Trent (Tata Group's fashion arm) saw substantial balance sheet expansion as store lease obligations were capitalised.
Practical expedients under Ind AS 116 allow companies to exempt short-term leases (lease term ≤ 12 months) and low-value asset leases from the new treatment. These exemptions were widely used in India for IT equipment leases, small office spaces, and vehicle leases, maintaining some simplification. Disclosure requirements include maturity analysis of lease liabilities, reconciliation of opening and closing balances, and the undiscounted cash flow commitments beyond the lease term.