Lease Accounting Unpacked: How IFRS 16 and Ind AS 116 Align and Diverge

Lease accounting underwent a major transformation with the introduction of IFRS 16 and Ind AS 116. Both standards were introduced to enhance transparency, eliminate off-balance sheet financing, and bring greater comparability to financial reporting across industries. Although Ind AS 116 is largely converged with IFRS 16, several jurisdictional and practical differences exist. This article unpacks the alignment and divergence between the two standards.

How well do you differentiate where IFRS 16 and Ind AS 116 align—and where they don’t?

The shift to ROU assets and lease liabilities isn’t a small update — it’s a fundamental rethinking of how businesses measure obligations.

1. Why the Shift? Understanding the Change from Old Standards

Historically, leases were classified as operating or finance leases, which allowed many entities to keep large commitments off the balance sheet. IFRS 16 and Ind AS 116 require lessees to recognize a Right-of-Use (ROU) asset and a corresponding lease liability for almost all leases, improving transparency and reflecting the economic substance of lease transactions.

2. Scope and Applicability

Both standards apply broadly to lease arrangements, with exemptions for certain items.

• Biological assets
• Mineral rights
• Service concessions
• Intangible assets (treatment differs — see below)

Key divergence: Ind AS 116 mandates the exclusion of leases of intangible assets, whereas IFRS 16 provides an optional scope exclusion.

3. Core Recognition and Measurement Principles

The overall structure is the same under both standards.

Lessee Accounting Model

Lessees must recognize:

• Lease liability: Present value of future lease payments.
• ROU asset: Initial measurement based on the lease liability plus direct costs, adjustments for incentives and restoration obligations.

The operating vs finance lease distinction is removed for lessees.

Lessor Accounting Model

Both standards retain the finance vs operating classification for lessors, and there are no material differences in lessor accounting mechanics.

4. Initial and Subsequent Measurement

Initial Measurement

Lease liability is measured at the present value of future lease payments, discounted using:

• The interest rate implicit in the lease, if determinable; otherwise
• The incremental borrowing rate (IBR).

ROU asset includes:

• Initial lease liability
• Initial direct costs
• Lease payments made at or before commencement
• Estimated dismantling/restoration costs

Subsequent Measurement

The lease liability is increased by interest expense and reduced by lease payments. The ROU asset is depreciated over the shorter of lease term or useful life, and is subject to impairment testing where applicable.

5. Areas Where IFRS 16 and Ind AS 116 Differ

While conceptually aligned, the two standards diverge in several practical and jurisdictional areas:

Determination of Lease Term

Indian legal enforceability, renewal rights and termination clauses can lead to different lease-term assessments under Ind AS 116 compared with IFRS 16, which focuses primarily on economic incentives.

Foreign Exchange Differences

IFRS 16 links directly to IAS 21 for foreign currency treatment. Ind AS 116 follows Ind AS 21 and includes India-specific guidance on translation and restatement of foreign currency leases.

Discount Rate Guidance

IFRS 16 offers principle-based guidance for selecting discount rates. Ind AS 116 is relatively more prescriptive, reflecting Indian market practices and borrowing conditions when determining the IBR.

Low-Value Asset Exemption

IFRS 16 offers illustrative examples (for example, small office equipment), while Ind AS 116 does not prescribe examples — entities must apply judgment based on materiality and context.

Sale and Leaseback Transactions

Both standards require assessment under revenue recognition principles to determine whether a sale has occurred, but Ind AS 116 includes additional clarifications consistent with Indian legal and property frameworks.

Transition Provisions and Disclosures

Both standards permit:

• Full retrospective application
• Modified retrospective approaches

Ind AS 116, however, involves additional disclosure requirements under Indian regulatory frameworks (for example, Schedule III), which can affect transition reporting.

6. Implications on Financial Statements

The practical effects are consistent across both frameworks:

• Balance Sheet: Assets and liabilities increase due to recognition of ROU assets and lease liabilities.
• Profit & Loss: Operating lease expense is replaced by depreciation (ROU asset) and interest (lease liability), typically increasing EBITDA but often reducing profit before tax in early years because of front-loaded interest.
• Cash Flows: Operating cash outflows reduce; financing cash outflows increase (principal portion of lease payments).

7. Industry-Wise Impact

The effect of these standards varies by industry:

• Retail: Store and distribution center leases materially increase reported assets and liabilities.
• Aviation: Aircraft lease capitalization significantly affects leverage and covenant metrics.
• Telecom: Tower, fiber, and equipment leases require careful accounting and measurement.
• Real Estate: Complexities arise in separating lease components from service components and applying local property law considerations.

8. Implementation Challenges

Common challenges when implementing either standard include:

• Assessing enforceability versus economic incentives when determining lease term
• Identifying embedded leases in service contracts
• Calculating an appropriate incremental borrowing rate across jurisdictions
• Managing lease modifications and reassessments
• Consolidating lease data from legacy systems and upgrading ERP/lease management software
• Handling large volumes of low-value leases with consistent policies

9. The Bigger Picture: Navigating Alignment and Divergence

IFRS 16 and Ind AS 116 share the same objective: to ensure lease obligations are transparently captured in financial statements. Differences largely reflect jurisdictional legal frameworks, economic conditions and regulatory disclosure requirements. Companies operating in India or across borders must understand both standards to ensure accurate reporting, compliance and informed decision-making.

Conclusion

The shift to IFRS 16 and Ind AS 116 marks a significant improvement in lease reporting and financial transparency. While the standards are converged in purpose and structure, nuanced differences matter in practice. Robust lease-data systems, clearly documented policies, and strong governance are essential to implement these standards effectively and to communicate the financial impact to stakeholders.