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MOSL: EXPERT SPEAK-Decoding the new lease accounting standard

EXPERT SPEAK: Decoding the new lease accounting standard 

 

Mr Sandip Khetan; Partner & National Leader, FAAS, EY India

Mr Sandip is a Chartered Accountant with over 20 years’ experience. He is a subject matter expert in Indian GAAP, IND AS, IFRS and US GAAP. Sandip has extensive experience in providing various assurance and advisory related services to clients across multiple industry segments like manufacturing, power, financial services, e-commerce, infrastructure and software. He is a special invitee to the Ind-AS implementation group of Institute of Chartered Accountants of India. Over the years, Sandip has been a trusted advisor to clients and has served as engagement partner for multiple client initiatives.. 

We hosted a conference call with Mr Sandip Khetan, Partner and National Leader of Financial Accounting Advisory Services (FAAS), EY India to decode the new lease accounting standard – Ind-AS 116. Mr Khetan believes that the impact from the new standard will be fairly broad and significant. His analysis on the BSE-100 companies suggests that the potential impact on the balance sheet, excluding banks, will be to the tune of ~INR1.4t. This new change will bring in consistency between companies that have different finance strategies and asset models (such as high lease asset v/s owned asset). 

Key Highlights:

• Ind-AS 116 – which has become effective from 1^st Apr’19 – will bring in a significant change in the financial statements of all companies. The standard will primarily impact the lessee, while lessor accounting will remain largely unchanged, except for the need to comply with the additional disclosure requirement.
• The new standard is doing away with the distinction between operating lease and finance lease. Thus, all leases will have to be recorded on the balance sheet.
• It requires companies to capitalize long-term liability toward operating lease payment (currently off balance sheet) in the balance sheet with a corresponding intangible asset in the form of right to use asset.
• This will eliminate income statement distortion between companies that used to own asset by financing it from banks and companies that used to lease assets to keep themselves asset-light.
• Operating lease expense shall no longer be charged to the income statement, and thus, EBITDA of all companies shall increase throughout the lease tenure.
• Depreciation on right to use asset and interest on lease liability shall now be charged in the income statement. On the other hand, (a) depreciation shall be charged using the straight line method over the life of the asset and (b) interest expense due to the unwinding of lease liability shall be higher in the initial period of the lease.