IND AS was introduced in India way back in 2015 with the inherent objective of devising a better compliance model and structure for the big Indian conglomerates so that they could prepare their financial statements for true and fair representation.
However, there were and still are many flaws in this implemented scheme of IND AS, which even go against the principles of accounting, which are the very foundation on which any standard of accounting is made.
IND AS 116: LEASES
IND AS 116 took a significant detour from the traditional accounting model as proposed by AS 19: Leases for the Lessee in terms of accounting for leases.
Under this upgraded AS, the lessee, instead of accounting for the lease as an operating or financial lease, is instructed to account for the for the lease as:
1. a) short-term leases and;
b) Leases for which the underlying asset is of low value or
2. leases other than those recognized above, i.e., long-term leases
Now, it becomes important to know what would constitute the leases as in point 1, therefore its definition is here as under:
A. Short-term leases
If any lease contract is made for 12 months or less than 12 months,.
Under this lease, the lessee is exempt from the application of IND AS 116 rules and can simply record lease payment on an SLM basis or apply another systematic basis if that basis is more representative of the pattern of the lessee's benefit.
B. Low-value leases
As per the provisions of IND AS 116, lessees can avail themselves of the exemption from applying IND AS 116 rules on the accounting of low-value leases. There is no clear explanation of these assets from the point of view of their value; however, the following two conditions need to be satisfied in order to classify a lease as a low-value lease:
- It should not be highly dependent or highly interrelated on or with other assets from the point of view of its use.
- Lessees can take advantage of low-value assets on their own without merging them with other sources.
Now, when it comes to the recognition of leases by the lessor, the IND AS follows the same definitions for the categorization of leases that were used under AS 19, i.e., operating and financial leases.
The Problem
IND AS 116 provides that the lessee should recognize the ROU (right of use) asset in the case of a long-term lease, and the subsequent recognition of the ROU asset is similar to that of a normal capital asset.
This accounting holds good in the case of a finance lease, where the lessor derecognizes the asset from his books of accounts and instead recognizes receivables in the form of lease rental receivables at the inception of the lease.
However, under an operating lease where the asset solely remains in the books of accounts of the lessor and the lessor only recognizes lease rentals as income on the SLM basis,.
This gives birth to the problem of "dual recognition." For the same transaction, both the lessee and the lessor record or have already recorded the same asset in the different books of accounts.
The lessor never derecognizes the asset in an operating lease, while the lessee records the asset in a long-term lease. This accounting rule, as prescribed by the IND AS, is completely flawed.
The given situation can be better understood with the following example:
A (lessor) gives an asset on an operating lease to B (lessee) for 3 years, and the asset is not a low-value asset.
In this immediate case, A will continue to hold the asset in his books of accounts, while B will also recognize the same asset in his books of accounts under a long-term lease.
CONCLUSION
The accounting treatment proposed by IND AS 116 for this above transaction is a clear detour from the accounting principles and should be corrected as soon as possible so that the ambiguity and uncertainty regarding the treatment of this transaction could be resolved.
The author can also be reached at Pranavbansal7722@gmail.com.
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