Ind AS 116 Leases: A Practitioner Guide for FY 2026-27
Ind AS 116 (Leases) is the Indian Accounting Standard that prescribes how companies must recognise, measure, present and disclose leases in their financial statements.
The Ministry of Corporate Affairs notified Ind AS 116 via the Companies (Indian Accounting Standards) Amendment Rules, 2019. The standard became effective for annual periods beginning on or after 1 April 2019 and replaced Ind AS 17.
For FY 2026-27, entities must consider the Lease Liability in a Sale and Leaseback amendment notified by MCA on 31 March 2024. Retailers and airlines in India have seen significant balance sheet expansion under Ind AS 116 due to long-term lease contracts.
Ind AS 116 at a Glance
Ind AS 116 establishes the single lessee accounting model in India. Every lessee must bring most leases onto the balance sheet as a right-of-use asset and a lease liability. This standard primarily applies to listed companies and large unlisted companies adopting Indian Accounting Standards.
| Field | Value |
|---|---|
| Standard Number | Ind AS 116 |
| Full Name | Leases |
| Issuing Body | ICAI (Accounting Standards Board) |
| Notified By | MCA, Companies (Indian Accounting Standards) Amendment Rules, 2019, dated 30 March 2019 |
| Effective Date | 1 April 2019 |
| Supersedes | Ind AS 17 (Leases) |
| Equivalent Standard | AS 19 (Leases) ↔ Ind AS 116 ↔ IFRS 16 |
| Applies To | All companies required to follow Ind AS under the MCA roadmap, including listed companies, companies with net worth >= Rs 250 crore, and their holding/subsidiary/associate/JV entities. |
What is Ind AS 116: Leases?
Ind AS 116 sets out how Indian companies must account for leases. The core principle requires lessees to recognise nearly all leases on the balance sheet as a right-of-use asset and a corresponding lease liability at inception. The only exceptions are short-term leases (12 months or less) and low-value asset leases if exemption is elected.
The Institute of Chartered Accountants of India introduced this standard to converge with IFRS 16 issued by the International Accounting Standards Board. It replaces the previous dual model of operating versus finance leases for lessees under Ind AS 17. For lessors, the operating versus finance distinction is largely retained.
CFOs, statutory auditors, finance teams of listed companies, NBFCs and students preparing for CA Final exams frequently use this standard in practice.
Objective of Ind AS 116
The objectives of Ind AS 116 are:
- Establish principles for recognition, measurement, presentation and disclosure of leases.
- Ensure faithful representation of lease transactions by both lessees and lessors.
- Provide users of financial statements a basis to assess how leases affect an entity’s financial position, performance and cash flows.
By enforcing these objectives, the standard ensures that financial statements present a true and fair view as required by Section 129 of the Companies Act, 2013. Accurate lease accounting supports transparency for lenders, investors and regulators reviewing Indian corporate financials.
Who Must Apply Ind AS 116?
Entities covered, applicability table
Ind AS 116 applies to all companies required to adopt Indian Accounting Standards as per the Ministry of Corporate Affairs roadmap:
| Category | Applicability Condition |
|---|---|
| Listed Companies | Mandatory if listed on any recognised stock exchange in India |
| Unlisted Companies | Mandatory if net worth ≥ Rs 250 crore |
| Group Entities | Holding/subsidiary/associate/JV of above companies also covered |
Phase I covers listed/unlisted companies with net worth ≥ Rs 500 crore from FY 2016-17 onwards. Phase II extends to those with net worth ≥ Rs 250 crore from FY 2017-18 onwards.
Scope exclusions
Ind AS 116 does not apply to:
- Leases for exploration or use of minerals, oil or natural gas.
- Leases involving biological assets covered by Ind AS 41.
- Service concession arrangements within scope of Ind AS 115.
- Licences of intellectual property granted by a lessor within scope of Ind AS 115.
- Rights held by lessees under licensing agreements within scope of Ind AS 38 (films, recordings etc).
When the standard does not apply
Each exclusion above is cross-referenced as follows:
Leases relating to minerals or oil are covered under sectoral guidance outside Ind AS. Biological asset leases fall under Ind AS 41 Agriculture. Service concession arrangements are addressed by Ind AS 115 Revenue from Contracts with Customers. Intellectual property licences are scoped into either Ind AS 115 or [Ind AS 38 Intangible Assets]. Licensing rights for films or patents are dealt with in [Ind AS 38].
Key Definitions under Ind AS 116
| Term | Definition |
|---|---|
| Lease | Contract conveying right to use an identified asset for a period in exchange for payment. |
| Right-of-use (ROU) asset | Lessee’s right to use underlying leased asset over lease term. |
| Lease liability | Lessee’s obligation for unpaid lease payments at present value. |
| Lease term | Non-cancellable period plus extension options reasonably certain to be exercised. |
| Short-term lease | Lease term not exceeding twelve months at commencement; no purchase option attached. |
| Low-value asset lease | Lease where underlying asset is low value when new (e.g., PC or small furniture). |
| Incremental borrowing rate | Rate lessee would pay to borrow funds over similar term/security as leased asset value. |
Recognition and Measurement under Ind AS 116
When to recognise
On the commencement date of a lease contract that falls within its scope (excluding short-term or low-value exemptions), the lessee must recognise both a right-of-use asset and a corresponding lease liability on its balance sheet (Para 22). The commencement date is when control over use of the identified asset passes to the lessee.
Short-term leases (term ≤12 months) and low-value asset leases can be kept off-balance sheet if exemption is elected (Para 5-8). In such cases, payments are expensed straight-line over the lease term or another systematic basis.
Initial measurement
At initial recognition:
Right-of-use Asset:
Measured at cost comprising:
Initial amount of lease liability,
Any lease payments made at/before commencement,
Initial direct costs,
Estimated dismantling/restoration costs,
Less any incentives received from lessor.
Lease Liability:
Measured at present value of unpaid future lease payments using either:
(a) Rate implicit in the lease; or
(b) Lessee’s incremental borrowing rate if implicit rate cannot be determined (Para 26).
**Formula:**
Lease Liability = PV (Unpaid Lease Payments discounted using appropriate rate)
Lease payments include fixed payments minus incentives receivable; variable payments linked to index/rate; residual value guarantees; purchase options expected to be exercised; penalties for terminating if reasonably certain exercised.
Subsequent measurement
After initial recognition:
Right-of-use Asset:
Carried at cost less accumulated depreciation/amortisation and impairment losses per Ind AS 36 Impairment. Adjusted for remeasurement events such as changes in lease term or modification.
Lease Liability:
Measured at amortised cost using effective interest method (Para 36-43). Remeasured when:
Future payments change due to index/rate change;
Lease term changes;
Option exercise assessment changes;
Contract modifications not accounted as separate new leases.
Remeasurements adjust both liability carrying amount and ROU asset carrying amount accordingly unless reduction triggers gain/loss recognition per Para 45-46A.
The Single Lessee Accounting Model
Ind AS 17 previously required operating versus finance classification for lessees, only finance leases appeared on balance sheet while operating leases were expensed off-balance sheet.
Under the single lessee accounting model, every qualifying lease now appears on balance sheet as both an ROU asset and corresponding liability except where specific exemption applies (short-term/low-value).
Lessor accounting retains dual classification, lessors continue distinguishing between operating and finance leases based on risk/reward transfer criteria set out in Para 61-98.
This approach aligns Indian practice with IFRS 16 globally while delivering greater comparability across industries such as retail chains or airlines where off-balance-sheet treatment was previously widespread.
Worked Examples on Ind AS 116
Example 1: Office building lease, 5-year term
Scenario:
Sundaram Infotech Pvt Ltd enters into a five-year office building lease in Pune,12,000 sq ft at Rs 40 lakh annual rent payable in advance each year; incremental borrowing rate is nine percent per annum.
Computation Table
| Component | Amount | Explanation |
|---|---|---|
| Annual Payment | Rs 40 lakh | Fixed rent per year |
| Number of Years | Five | Non-cancellable period |
| Discount Rate | Nine percent | Incremental borrowing rate |
| PV Factor (Annuity Due) | Calculated | Based on five periods at nine percent |
| Present Value | Rs 169.51 lakh | PV(5 x Rs 40 lakh @ nine percent annuity due basis) |
Journal Entry
On commencement date:
Dr Right-of-use Asset Rs 169.51 lakh
Cr Lease Liability Rs 169.51 lakh
Example 2: Short-term equipment lease, exemption election
Scenario:
Maharashtra Cement Ltd leases one forklift for nine months at Rs 2 lakh per month; company elects short-term exemption under Para 6.
Computation Table
| Component | Amount | Explanation |
|---|---|---|
| Monthly Payment | Rs 2 lakh | Fixed rent |
| Lease Term | Nine months | Short-term (<12 months), no purchase option |
| Total Expense | Rs 18 lakh | Nine x Rs 2 lakh |
Journal Entry
Each month during nine-month period:
Dr Lease Expense Rs 2 lakh
Cr Bank Rs 2 lakh
Disclosure Requirements under Ind AS 116
Ind AS 116 mandates detailed disclosures to ensure users of financial statements can assess the impact of leases on an entity’s financial position and performance. Schedule III to the Companies Act, 2013 requires companies to present these disclosures in their notes to accounts for transparency and auditability.
| Item | Requirement | Para Reference |
|---|---|---|
| Depreciation charge for ROU assets by class | Disclose for the period | Para 53(a) |
| Interest expense on lease liabilities | Disclose for the period | Para 53(b) |
| Expense relating to short-term leases | Disclose if exemption elected | Para 53(c) |
| Expense relating to leases of low-value assets | Disclose if exemption elected | Para 53(d) |
| Expense relating to variable lease payments | Not in lease liability measurement | Para 53(e) |
| Total cash outflow for leases | Disclose for the period | Para 53(g) |
| Additions to ROU assets during the period | Movement schedule | Para 53(h) |
| Carrying amount of ROU assets at reporting date | Closing balance by class | Para 53(j) |
| Maturity analysis of lease liabilities | Apply Ind AS 107 disclosure framework | Para 58 |
Auditors must verify that all required disclosures under Ind AS 116 are presented clearly and completely as part of their opinion under SA 700.
Common Mistakes & Industry-Specific Considerations
Common errors auditors flag
- Failure to identify embedded leases inside service contracts (especially in IT outsourcing and logistics agreements)
- Incorrect determination of lease term, extension options not assessed for reasonable certainty of exercise
- Use of risk-free rate instead of the lessee's incremental borrowing rate for discounting
- Non-recognition of dismantling and restoration costs in initial ROU measurement
- Treating contract modifications as new leases without performing the prescribed remeasurement
- Misapplication of the low-value exemption based on aggregate value rather than per-asset value when new
Industry application notes
Retail:
Long-term store leases expand balance sheets significantly. Retailers must revisit debt covenants linked to gross debt or asset turnover ratios. In our audit practice we frequently observe that lenders require updated covenant testing post-Ind AS 116 adoption.
Telecom:
Tower-sharing contracts often contain embedded leases. These arrangements require careful separation of lease and service components, ensuring compliance with the standard’s identification criteria.
Aviation:
Aircraft and engine leases form a major part of airline balance sheets after Ind AS 116. Sale-and-leaseback transactions need rigorous evaluation using the seller-lessee accounting model, especially when determining if a genuine sale has occurred.
Ind AS 116 vs AS 19 vs IFRS: Key Differences
The table below outlines key differences between Ind AS 116, AS 19 (Leases), and IFRS 16 (the international equivalent):
| Aspect | AS 19 | Ind AS 116 | IFRS |
|---|---|---|---|
| Lessee classification | Operating vs Finance distinction | Single model, all leases on balance sheet | Single model (IFRS 16), same as Ind AS |
| Short-term lease exemption (<=12 months) | Not applicable | Available | Available |
| Low-value asset lease exemption | Not applicable | Available | Available |
| Lessor accounting | Operating vs Finance distinction | Operating vs Finance distinction retained | Operating vs Finance distinction retained |
| Off-balance-sheet operating leases | Permitted | Eliminated for lessees | Eliminated for lessees |
| Sale and leaseback | Based on lease classification | Apply Ind AS 115 to determine if a sale has occurred | Apply IFRS 15 to determine if a sale has occurred |
| Discount rate (lessee) | Implicit rate or incremental borrowing rate | Implicit rate; incremental borrowing rate if implicit not readily determinable | Same as Ind AS |
India’s implementation through Ind AS 116 closely mirrors IFRS 16, but certain transition reliefs and practical expedients are tailored for Indian corporates. The short-term and low-value exemptions are not available under legacy Indian GAAP (AS 19).
Latest Amendments to Ind AS 116 (FY 2026-27)
- Lease Liability in a Sale and Leaseback, MCA Notification G.S.R. 242(E) dated 31 March 2024, effective annual reporting periods beginning on or after 1 April 2024.
This amendment clarifies how a seller-lessee should subsequently measure lease liabilities arising from sale-and-leaseback transactions. Entities must ensure compliance from FY 2026-27 onwards.
No ICAI EAC opinions or NFRA observations have been issued specific to this amendment as of May 2026.
Related Standards You Should Know
- [Ind AS 115](/ind-as-115-revenue-from-contracts-with-customers/), Service concession arrangements are excluded from Ind AS 116; sale-and-leaseback assessment uses Ind AS 115.
- [Ind AS 36](/ind-as-36-impairment-of-assets/), Impairment testing of right-of-use assets follows Ind AS 36.
- [Ind AS 7](/ind-as-7-statement-of-cash-flows/), Cash flow classification: principal portion in financing, interest portion in operating or financing activities.
- [AS 19](/as-19-leases/), Equivalent standard under Indian GAAP; retains operating vs finance lessee classification.
- [Ind AS 107](/ind-as-107-financial-instruments-disclosures/), Maturity analysis disclosure framework for lease liabilities follows Ind AS 107.
Need Help with Ind AS 116 Compliance?
Patron Accounting LLP advises listed companies, NBFCs, and mid-market businesses across India on every aspect of Ind AS 116 compliance. Our team ensures your financial statements meet all regulatory expectations under Schedule III and withstand scrutiny from statutory auditors.
Our services include:
- Statutory Audit
- Ind AS Advisory
- Financial Reporting & Schedule III Compliance
- Disclosure Review
Schedule a 30-minute consultation with our Ind AS team, Pune · Mumbai · Delhi · Gurugram.
Frequently Asked Questions (FAQs)
Ind AS 116 Leases is the Indian Accounting Standard that prescribes how companies must recognise, measure, present, and disclose leases in their financial statements. It requires most lessees to record right-of-use assets and corresponding lease liabilities on the balance sheet except where specific exemptions apply.
Yes. Private limited companies with net worth at least Rs 250 crore that are required by MCA rules to follow Indian Accounting Standards must comply with Ind AS 116 Leases from their applicable transition date onward.
Under Ind AS 116, lessees bring almost all leases onto their balance sheet as right-of-use assets and liabilities. In contrast, under legacy Indian GAAP (AS 19), only finance leases were recognised; operating leases remained off-balance sheet for lessees.
A low-value asset is an underlying asset that is typically low in value when new, such as personal computers or small office furniture, regardless of whether it is material in aggregate. Entities must assess each asset individually rather than aggregating values across multiple items.
Non-compliance may result in qualified audit opinions, regulatory action by NFRA or MCA, restatement requirements under Section 129 or Section 134 of the Companies Act, 2013, and reputational risks impacting access to capital markets or lender relationships.
The latest amendment is “Lease Liability in a Sale and Leaseback,” notified by MCA via G.S.R. 242(E), effective for annual periods beginning on or after April 1, 2024. It clarifies subsequent measurement rules for seller-lessees in such transactions.
The Ministry of Corporate Affairs notified Ind AS 116 effective from annual reporting periods beginning on or after April 1, 2019. All entities within its scope had to adopt it from their first financial year commencing after this date.
Real-estate developers must assess whether their contracts create a lease or service arrangement under the standard’s criteria. Revenue recognition may shift depending on whether control transfers over time (Ind AS 115 applies) or if there is an identified leased asset (Ind AS 116 applies).
Yes. Lessees can elect not to recognise right-of-use assets or liabilities for short-term leases (12 months or less without purchase options) and low-value asset leases. Lease payments under these exemptions are expensed straight-line over the term.
Yes. If there is a change in lease term, future payments due to index/rate changes, reassessment of option exercise likelihood, or contract modification not accounted as a separate new lease, both right-of-use asset and liability must be remeasured per Paras 39-46A.
About This Article
Reviewed by CA & CS Team · Patron Accounting LLP
Technical reviewer: CA Sundram Gupta, FCA
Last reviewed: 2026-05-02
Sources: ICAI Compendium of Accounting Standards · MCA Notification (Companies (Indian Accounting Standards) Amendment Rules, 2019, dated 30 March 2019) · IFRS Foundation