Ind AS 116 Lease Accounting: Right-of-Use Asset, Lease Liability and Practical Year-End Checklist

Ind AS 116 changes lease accounting most visibly for lessees. Instead of keeping many operating leases outside the balance sheet, the standard uses a single lessee accounting model under which most leases create a right-of-use asset and a lease liability. The practical challenge is not only calculating present value. Finance teams first need to decide whether a contract contains a lease, whether an exemption applies, which payments belong in the liability, what goes into the right-of-use asset, and how the balances should move after commencement.

ICAI's current 2025-26 Compendium of Indian Accounting Standards includes Ind AS 116 in Volume I. ICAI also provides an official Educational Material on Ind AS 116 landing page and a detailed Educational Material PDF with examples and implementation guidance.

Start with the first question: is the contract actually a lease?

Ind AS 116 applies when a contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. In practical terms, the customer should have the right to obtain substantially all of the economic benefits from using the identified asset and the right to direct how and for what purpose that asset is used during the relevant period.

This matters for contracts that look like service arrangements. A dedicated vehicle, warehouse floor, machine or network asset may contain a lease if the customer controls its use. A contract is not treated as a lease merely because an asset is involved somewhere in the supplier's delivery process. The accounting file should therefore document the identified asset, substitution rights, economic benefits and decision-making rights before any present-value calculation begins.

What does the lessee normally recognise?

For companies applying Ind AS, ICAI describes Ind AS 116 as a single lessee accounting model. For most leases, the lessee recognises a right-of-use asset and a lease liability at the commencement date. The standard has recognition exemptions for qualifying short-term leases and leases of low-value underlying assets, so not every rental arrangement produces a balance-sheet asset and liability.

A short-term lease is a lease that, at commencement, has a lease term of 12 months or less and does not contain a purchase option. The short-term election is made by class of underlying asset. The low-value exemption is assessed by reference to the value of the underlying asset when new and is available on a lease-by-lease basis. ICAI's educational material gives examples of low-value assets such as tablets, personal computers, small office furniture and telephones, while noting that a car would not normally qualify merely because a particular used car is inexpensive.

How is the lease liability measured initially?

At commencement, the lease liability is measured at the present value of lease payments that have not yet been paid. The discount rate is the interest rate implicit in the lease if that rate can be readily determined. If it cannot, the lessee uses its incremental borrowing rate.

This is the point where many spreadsheets fail. A correct lease schedule needs the payment dates, fixed and in-substance fixed payments, relevant index- or rate-linked payments, purchase or termination amounts where the standard requires them, and the correct lease term. The discount rate should be supported rather than copied from an unrelated borrowing merely because that rate is easy to obtain.

What goes into the right-of-use asset?

The initial right-of-use asset is not always equal to the lease liability. ICAI's Ind AS 116 material explains that its cost includes the initial lease liability, lease payments made at or before commencement less lease incentives received, qualifying initial direct costs, and an estimate of certain dismantling, removal or restoration obligations where applicable.

This means a lease with an upfront payment, incentive or direct incremental cost can produce a right-of-use asset that differs from the opening lease liability. The accounting memo should reconcile each component instead of forcing both balances to match.

A simple worked illustration

Assume an entity takes an office on a three-year lease. Rent of ₹6,00,000 is payable at the end of each year. The discount rate is 10% a year. Assume there are no upfront payments, incentives, initial direct costs, restoration obligations or purchase options.

• The present value of the three annual payments is approximately ₹14,92,111. That is the opening lease liability under these simplified assumptions.
• Because there are no other opening adjustments in the example, the initial right-of-use asset is also approximately ₹14,92,111.
• If the right-of-use asset is depreciated straight-line over the three-year lease term in this fact pattern, annual depreciation is approximately ₹4,97,370.
• Year-one interest on the lease liability at 10% is approximately ₹1,49,211.
• After adding that interest and paying the first ₹6,00,000 instalment, the closing lease liability is approximately ₹10,41,322.

The illustration is deliberately simple. Real leases may require a different lease term, remeasurement, index-linked payment changes, modifications, incentives, restoration provisions or other adjustments. The purpose of the example is to show the separate movement of the asset and liability after initial recognition.

What happens after commencement?

Under the cost model, the right-of-use asset is generally carried at cost less accumulated depreciation and impairment, subject to the standard's specific requirements and interactions with other Ind AS. The lease liability is increased for interest, reduced for lease payments and remeasured when specified changes require a fresh measurement.

The profit and loss effect therefore usually differs from a simple straight-line rent entry. Depreciation on the right-of-use asset and interest on the lease liability are separate components. ICAI's material also states that interest expense on the lease liability is presented separately from depreciation of the right-of-use asset, with the interest forming part of finance costs.

Year-end checklist for finance teams

1. Reconcile the lease population. Compare the lease register with rent expense, vendor masters, legal contracts, property schedules and new procurement arrangements so that embedded leases are not missed.
2. Reassess lease terms. Review extension, termination and purchase options where facts or circumstances have changed and the standard requires reassessment.
3. Check discount-rate support. Preserve the basis for the implicit rate or incremental borrowing rate used for new or remeasured leases.
4. Reconcile the liability roll-forward. Opening liability plus interest and required remeasurements less payments should agree with the closing lease liability.
5. Reconcile the right-of-use asset. Check additions, depreciation, impairment, modifications, disposals and remeasurement adjustments.
6. Review exemptions. Confirm that short-term and low-value elections are applied consistently and only where the criteria are met.
7. Check presentation and disclosures. Ensure right-of-use assets, lease liabilities, finance costs, depreciation and required lease disclosures are mapped correctly to the financial statements and notes.
8. Investigate manual overrides. A lease schedule that has been manually forced to match the general ledger is a warning sign; the source contract and measurement logic should explain the difference.

Common mistakes to avoid

• Starting with the rent schedule without first assessing whether the contract contains a lease.
• Treating every lease of 12 months as short-term without checking whether a purchase option exists.
• Assuming a low carrying price for a used asset automatically makes the underlying asset low value.
• Using a convenient discount rate without documenting why it is appropriate.
• Setting the right-of-use asset equal to the lease liability even when incentives, prepaid rent, direct costs or restoration obligations exist.
• Continuing to book only rent expense after commencement even though Ind AS 116 requires asset depreciation and lease-liability interest for a recognised lease.
• Ignoring changes in lease terms or payments that may require remeasurement.

Practical takeaway

A reliable Ind AS 116 process is a sequence, not a spreadsheet trick: identify whether the contract contains a lease, determine the lease term and exemption status, measure the lease liability at present value, build the right-of-use asset from its required components, and then maintain separate asset and liability roll-forwards through the life of the lease. At year-end, the strongest file is one that lets a reviewer trace every major balance back to the contract, the discount-rate support, the lease schedule and the current ICAI standard framework.