Ind AS 116 Lease Accounting in Excel: ROU Asset, Lease Liability and Worked Example

Ind AS 116 put almost every lease on the lessee's balance sheet. Instead of a rent expense, you now carry a lease liability (the present value of future lease payments) and a right-of-use (ROU) asset, and the profit and loss account shows depreciation and interest. The calculations are not hard, but they are easy to get slightly wrong in Excel, and a small error in the discount rate or timing carries through every year.

This guide walks through the measurement rules and a complete worked example you can rebuild.

Is it a lease?

Under paragraph 9, a contract is, or contains, a lease if it conveys the right to control the use of an identified asset for a period of time in exchange for consideration. Control means you get substantially all the economic benefits from using the asset and you direct how and for what purpose it is used. If the supplier can swap the asset whenever it likes and benefits from doing so (a substantive substitution right), there is no identified asset and no lease.

The two exemptions

A lessee may choose not to apply the balance sheet model to:

• Short-term leases: a lease term of 12 months or less at commencement, with no purchase option. This election is made by class of underlying asset.
• Leases of low-value assets: judged on the value of the asset when new, regardless of how big the lessee is. This election can be made lease by lease.

For these, the payments are recognised as an expense on a straight-line or another systematic basis (paragraph 6). Ind AS 116 gives no rupee threshold for "low value". Laptops, mobile phones and small furniture are typical examples; cars and office premises are not. Write a policy, set your own threshold, and apply it consistently.

Initial measurement

Lease liability (paragraphs 26 and 27)

The lease liability is the present value of the lease payments not paid at the commencement date. Lease payments include fixed payments (less any lease incentives receivable), variable payments that depend on an index or rate, amounts expected under residual value guarantees, a purchase option you are reasonably certain to exercise, and termination penalties if the lease term reflects termination.

Variable payments linked to sales or usage are not included; they are expensed as they occur.

Lease term

The lease term is the non-cancellable period plus periods covered by an extension option you are reasonably certain to exercise, and periods covered by a termination option you are reasonably certain not to exercise (paragraph 18). For premises with a lock-in and long renewal options, this judgement often matters more than the discount rate.

Discount rate

Use the interest rate implicit in the lease if it can be readily determined. Lessees usually can't determine it, so they use their incremental borrowing rate (IBR): the rate the lessee would pay to borrow, over a similar term and with similar security, the funds needed to obtain an asset of similar value to the ROU asset in a similar economic environment.

In practice, build the IBR from:

1. a reference rate for the lease term (for example, government security yields of matching tenor);
2. a credit spread for the lessee, from recent borrowings or the rates banks have quoted;
3. a lease-specific adjustment for the security the leased asset provides and the term.

Document the build-up. Auditors will ask for it.

ROU asset (paragraph 24)

ROU asset = lease liability + lease payments made at or before commencement − lease incentives received + initial direct costs + estimated costs of dismantling or restoring the site.

Worked example

A company leases office premises with these terms:

Step 1: Lease liability at commencement

Present value of five payments of ₹10,00,000 at 10%, paid in arrears:

PV = 10,00,000 × [1 − (1.10)^−5] ÷ 0.10 = 10,00,000 × 3.790787 = ₹37,90,787

In Excel: =PV(10%,5,-1000000) returns 37,90,787.

Step 2: ROU asset

ROU asset = ₹37,90,787 + ₹50,000 = ₹38,40,787. Annual depreciation = ₹38,40,787 ÷ 5 = ₹7,68,157.

Step 3: Lease liability schedule

Interest each year is 10% of the opening liability. The closing liability is the opening liability plus interest less the payment.

Step 4: ROU asset and profit and loss charge

The check: total charge of ₹50,50,000 equals the payments of ₹50,00,000 plus the initial direct costs of ₹50,000. If your model doesn't tie, the error is usually in timing (payments in advance treated as arrears) or the rate (an annual rate used with monthly payments).

Step 5: Journal entries for year 1

Step 6: Current and non-current split at the end of year 1

The liability at the end of year 1 is ₹31,69,865. The amount that will be settled in year 2 is the payment less year-2 interest: ₹10,00,000 − ₹3,16,987 = ₹6,83,013 (current). The rest, ₹24,86,852, is non-current, which is the closing liability at the end of year 2.

Building it in Excel without errors

• Keep one row per period and use the same period for rate and payments: for monthly payments use (1+annual rate)^(1/12)−1 or the rate your policy specifies, not the annual rate.
• For payments in advance, the payment made on day one is not part of the lease liability: it goes straight into the ROU asset. The liability is the PV of the remaining payments, =PV(rate,n−1,−pmt), and each later payment falls at the start of its period.
• Calculate the closing liability with a formula; never type it.
• Add a check row: the liability at the end of the term must be zero, and total P&L must equal payments plus initial direct costs.
• For rent escalations (for example 5% every three years), list each year's payment and use NPV on the payment column instead of PV.

Remeasurement and modifications

When the lease payments or term change (an escalation linked to an index, a change in your assessment of an extension option, or a negotiated modification), you remeasure the liability using the revised payments and, in most cases, a revised discount rate, and adjust the ROU asset by the same amount (paragraphs 39 to 46). A lease modification that adds a separate right of use at a stand-alone price is accounted for as a separate lease.

Presentation and disclosure

Present ROU assets separately from other assets, or disclose which line items include them, and present lease liabilities separately or disclose them (paragraph 47). In the cash flow statement, principal repayments are financing activities; interest follows your policy for interest paid under Ind AS 7; short-term, low-value and variable payments are operating activities (paragraph 50). Disclosures (paragraph 53) include depreciation by class, interest expense, short-term and low-value lease expense, total cash outflow for leases and the closing ROU asset by class.

Frequently asked questions

Sources

1. IFRS Foundation: IFRS 16 Leases (Ind AS 116 is converged with IFRS 16)
2. Ministry of Corporate Affairs: Companies (Indian Accounting Standards) Rules, 2015
3. ICAI: Ind AS standards and educational material

General information only, not professional advice. Rules change; check the current law and your facts before acting.