Leases, the New Standard, A New Era!
On 29 March 2019, Ministry of Corporate Affairs (MCA) has made an announcement that Ind AS 116 will be applicable from 1st April 2019 and necessary notification shall be issued in due course after complying with the necessary procedures.
Subsequently, on 30 March 2019, the new standard has been gazetted to be in force from 1 April 2019 along with consequential amendments in the Companies (Indian Accounting Standards) Rules, 2015.
The new leases standard requires that the lessees have to bring all leases onto the balance sheet, applying a “right-of-use asset” model that would recognize an asset on the lessee’s balance sheet (representing its right to use the leased asset over the lease term), and recognize a corresponding liability to make future lease payments.
As such, a lessee’s current operating lease accounting model will change significantly. The lessor accounting model will largely remain unchanged from that applied under current guidance.
The standard provides certain recognition exemptions which allow companies to recognize lease payments as an expense and not apply the requirements of Ind AS 116. Entities may use a retrospective approach, modified retrospective approach or a modified simplified approach to transition to Ind AS 116, with a portfolio practical expedient for a homogeneous set of contracts that can be applied under restrictive conditions.
Amongst others, Companies could face the following challenges while implementing the new standard:
- Understanding the nuances of the standard especially in key judgment areas like identifying arrangements that require to be classified as leases e.g., embedded lease arrangements; determining lease term; determining incremental borrowing rate, separation of the lease and non-lease payments, transition options, etc.
- Identification and implementation of an appropriate technology solution which conforms to such requirements based on the complexity of their accounting and reporting requirements and the number of leases.
- In on-boarding, the various contracts into the technology solution, many of the contracts may not even be available at one place and many of these could be in different formats ranging from hard copies to scanned copies, etc.
- In meeting the timelines. This is a deadline driven event and Companies have to perform a continuous assessment in order to ensure timely reporting to the audit committee and the other stakeholders.