Background:
The Institute of Chartered Accountants of India (ICAI) has repeatedly observed instances where financial reporting disclosures fall short of meeting statutory requirements or fail to offer stakeholders a comprehensive depiction of a company’s financial position. Through diligent scrutiny, several deficiencies in reporting practices related to lease accounting under IND AS 116 have been identified. Recognizing these shortcomings is crucial for preparers and presenters to rectify and improve their reporting standards. By addressing these commonly observed pitfalls, companies can ensure transparency, compliance, and accuracy in their financial disclosures:
Shortcomings: IND AS 116 “Lease Accounting”
| S. No. | Observation(s) | Remarks |
| 1 | It was observed that leased assets are depreciated over the period of lease term with no reference to the useful life of the asset or Lease term. | When a lessor transfers ownership of the asset to the lessee by the end of the lease term or if the cost reflects the lessee’s intention to buy the asset, the lessee depreciates the right-of-use asset from the start to the end of the asset’s useful life. If not, the lessee depreciates it from the start to either the end of the right-of-use asset’s useful life or the lease term, whichever comes first. |
| 2 | It was observed that companies have not disclosed the maturity analysis of lease liabilities for lessee as per Ind AS 116. | Companies should perform the maturity analysis of Lease Liabilities as mentioned in below table: Lease Liability As per 31st March 2024 As per 31st March 2023 Before 3 Month 3-6 Month 6-12 Month 1-3 Month 3-5 Month Above 5 Years Total |
| 3 | It was observed that the companies have not presented the right-of-use assets appropriately in the financial statements. | Ind AS 116 requires a lessee to either present right-of-use assets separately in the balance sheet or disclose them in the notes. If the lessee chooses not to present them separately, they must either include the right-of-use assets within the same line item as the corresponding underlying assets would be if owned or disclose which line items in the balance sheet include right-of-use assets. |
| 4 | It was observed that companies had not given the disclosures for short-term leases and leases of low-value assets as required under Ind AS 116. | Ind AS 116 states that a lessee who accounts for short-term leases or leases of low-value assets as per paragraph 6 must disclose this fact. Additionally, the lessee must disclose the following: The expense related to short-term leases accounted in the books of accounts. This expense should exclude the expense related to leases with a term of one month or less.The expense related to leases of low-value assets accounted in the books of accounts. This expense should exclude the expense related to short-term leases of low-value assets included in paragraph 53(c). |
| 5 | It was observed in some cases including entities of financial service sector, do not meet the disclosure objective as per Ind AS 116 that provide adequate information to users of financial statements. | Disclosure under Ind AS 116 for Lessee – 1-Lessees must disclose information that enables users to assess the impact of leases on financial position, performance, and cash flows 2-Information about leases should be disclosed in a single note or a separate section in financial statements. 3- Disclosure should be presented in a tabular format unless another format is more suitable. Costs included in the carrying amount of another asset during the reporting period should be included in the disclosed amounts 4- The following amounts must be disclosed for the reporting period Depreciation charge for right-of-use assets by class of underlying assetInterest expense on lease liabilitiesExpense related to short-term leases, excluding leases with a term of one month or lessTotal cash outflow for leasesGains or losses from sale and leaseback transactions |
| SW Remarks: Companies must adhere to the statutory requirements mentioned above and use the correct terminologies and disclosure requirements. |
Umang Mittal, Audit Associate, SW
