The method of recording leased assets and liabilities on a company's balance sheet under Ind AS 116/IFRS 16.
Under Ind AS 116 (effective April 2019), lessees must recognize almost all leases on the balance sheet as a Right-of-Use (ROU) asset and corresponding Lease Liability. This replaced the old standard where operating leases were off-balance sheet (only rent expense in P&L). Now, companies show the full lease commitment as both an asset and liability, affecting key ratios like debt-to-equity, EBITDA, and return on assets. Short-term leases (<12 months) and low-value leases (< ₹5 lakh) can still be expensed directly.
Company leases office space: ₹5,00,000/month for 5 years. Discount rate: 8%. Lease Liability (PV of 60 payments): ₹2,46,51,000. ROU Asset: ₹2,46,51,000. Monthly entry: Dr. Depreciation ₹4,10,850 (ROU/60), Dr. Interest ₹1,64,340, Cr. Lease Liability ₹3,35,660, Cr. Cash ₹5,00,000. Total expense front-loaded vs straight-line under old standard.
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Significantly: Debt-to-equity increases (new lease liability), EBITDA increases (rent replaced by depreciation + interest — both below EBITDA line), Asset turnover decreases (higher total assets), Interest coverage decreases (new interest component). Companies with large lease portfolios (retail, airlines, IT) see the biggest impact.
Two exemptions: 1) Short-term leases with term ≤12 months (with no purchase option) — can expense as rent. 2) Low-value leases where underlying asset value is ≤ approximately ₹5 lakh when new (laptops, small equipment) — can expense as rent. The election is made per-lease and simplifies accounting for immaterial items.
Long-term tangible assets owned by a business that are used in operations and not intended for sale, such as land, buildings, machinery, vehicles, and equipment.
The systematic allocation of the cost of a tangible asset over its useful life, representing the decline in value due to wear, use, or obsolescence.
The use of borrowed funds (debt) to finance business operations, amplifying both potential returns and risks for equity shareholders.
A financial ratio comparing a company's total debt to its shareholders' equity, measuring how much the business relies on borrowed money versus owner investment.
The ongoing costs incurred by a business in its day-to-day operations, including rent, salaries, utilities, marketing, and administrative expenses.
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