Regulatory updates

Accounting updates

Updates from MCA

Back

As per IFRS 16, Leases or Ind AS 116, Leases1Ind AS 116 is converged with IFRS, variable lease payments that are not based on an index or a rate are not considered as a part of ‘lease liability’, and instead would be recognized directly in the statement of profit or loss. However, globally, it was discussed, on how to measure the right-of-use asset and lease liability if variable lease payments arise in a sale-and-leaseback transaction2The IFRS Interpretations Committee (IFRIC) discussed of a situation where all of the lease payments in the leaseback depend on the future sales of the seller-lessee. In such a case it was discussed whether it would be it acceptable for the lessee to measure the right-of-use asset and lease liability at zero and, therefore, recognise a full gain or loss on the sale at the date of the transaction. and subsequent accounting of the lease liability. Consequently, amendments were issued to IFRS 16 on this matter.

The Ministry of Corporate Affairs (MCA) through its notification dated 9th September 2024 issued similar amendments to Ind AS 116 vide the Companies (Indian Accounting Standards) Second Amendment Rules, 2024 (Amendment Rules).

The amendments prescribe the following On initial recognition, the seller lessee includes variable lease payments when it measures a lease liability arising from a sale and leaseback transaction

For this purpose, a seller-lessee may adopt different approaches – i.e. estimate the expected lease payments at the commencement date or consider that there will be equal lease payments over the lease term.

After initial recognition, the seller lessee applies the general requirements for subsequent accounting of the lease liability such that it recognizes no gain or loss relating to the right of use it retains.

Accordingly, any difference between the payments made for the lease and the lease payments that reduce the carrying amount of the lease liability would be recognized in profit or loss.

Effective date and transition: The amendments are effective for annual reporting periods beginning on or after 1 April 2024. As per Ind AS 8, Accounting Policies, Changes in Accounting Estimates and Errors, a seller-lessee will need to apply the amendments retrospectively to sale-and-leaseback transactions entered into on or after the date of initial application of Ind AS 116.

To access the text of the amendments, please click here

Action points for auditors

  • As per Ind AS 8, seller-lessees will need to identify and re-examine sale-and-leaseback transactions entered into since implementation of Ind AS 116, and potentially restate those that included variable lease payments. Considering the implications in the profit and loss, auditors of companies which would be impacted by such amendments should start their discussions with management.
  • Since these amendments are effective from 1 April 2024 and have been issued in September 2024, the adjustments pertaining to Q1 2024 (i.e. for the period from 1 April 2024 to 30 June 2024) would need to be evaluated where a company prepares quarterly financial statements.
  • Under IFRS, the following amendments are effective from 1 January 2024, however, are yet to be notified under Ind AS:
  • Amendments to Ind AS 1, Presentation of Financial Statements, with regard to current and non-current classification of liabilities
  • Amendments to Ind AS 7, Statement of Cash Flows and Ind AS 107, Financial Instruments: Disclosure with regard to disclosure requirements in case of supplier finance arrangements.

Our Insights

Tools and Enablers
Resources
Events and Webinars
Sectoral Insights

Reach out to us

;