The Ultimate Guide to Ind AS 116: Lessee vs Lessor Accounting

Ind AS 116, Leases, changed the way companies account for lease transactions in India. It replaced the earlier lease accounting model under Ind AS 17 and aligned Indian standards with IFRS 16. The most significant impact was on lessees, who are now required to recognize most leases on the balance sheet.

In this blog, we will explain the accounting treatment, journal entries, disclosures, and differences between Lessee vs Lessor Accounting under Ind AS 116.

Still Unsure How Lessee vs Lessor Accounting Works Under Ind AS 116?

Ind AS 116 turns complex accounting into clear business value. Lessee or Lessor—every role matters under Ind AS 116.

What is Ind AS 116?

Ind AS 116 prescribes principles for:

• Recognition
• Measurement
• Presentation
• Disclosure of leases

It applies when one party grants another party the right to use an identified asset for a period of time in exchange for consideration.

Examples of Lease Assets

• Office Buildings
• Vehicles
• Machinery
• IT Equipment
• Retail Stores
• Land

Who is a Lessee and Who is a Lessor?

Lessee

A lessee is the party that obtains the right to use an asset and pays lease rentals.

Example: A company rents office space for 5 years.

Lessor

A lessor is the owner of the asset who grants usage rights in return for lease payments.

Example: Property owner leasing office premises to a company.

Major Change Introduced by Ind AS 116

Earlier under Ind AS 17:

• Operating leases were off-balance sheet for lessees
• Finance leases were on-balance sheet

Under Ind AS 116:

• Almost all leases are recognized on the balance sheet by lessees
• Right-of-Use Asset (ROU Asset) is recognized
• Lease Liability is recognized

Lessee Accounting Under Ind AS 116

Initial Recognition

At the lease commencement date, a lessee records:

• Right-of-Use Asset
• Lease Liability

Lease Liability Measurement

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

• Interest rate implicit in lease, or
• Incremental borrowing rate

Journal Entry at Commencement

Right-of-Use Asset Dr.
To Lease Liability

Subsequent Measurement

• ROU Asset is depreciated over lease term
• Lease Liability increases with interest cost
• Lease Liability decreases when payments are made

Exemptions for Lessees

• Short-Term Leases (12 months or less)
• Low-Value Assets such as laptops, printers, furniture

These may be expensed directly instead of capitalization.

Lessor Accounting Under Ind AS 116

Lessor accounting remains largely unchanged. Lessors classify leases as:

• Finance Lease
• Operating Lease

Finance Lease

Substantially all risks and rewards are transferred to the lessee.

Examples: Long-term machinery lease, lease ending with ownership transfer.

Operating Lease

Risks and rewards remain with the lessor.

Examples: Monthly office rental, short-term vehicle lease.

Finance Lease Entry

Lease Receivable Dr.
To Asset

Operating Lease Entry

Bank Dr.
To Rental Income

Lessee vs Lessor Accounting – Key Differences

• Lessee: Recognizes ROU Asset and Lease Liability
• Lessor: Recognizes receivable or rental income depending on classification
• Lessee: Depreciation and interest expense
• Lessor: Finance income or rental income

Impact on Financial Statements

For Lessees

• Assets increase
• Liabilities increase
• Rent expense replaced by depreciation and finance cost
• EBITDA improves

For Lessors

• Depends on lease classification
• Rental income or finance income recognized

Important Disclosures Under Ind AS 116

Lessee Disclosures

• Depreciation on ROU assets
• Interest expense
• Short-term lease expense
• Low-value lease expense
• Maturity analysis of lease liabilities

Lessor Disclosures

• Lease income
• Finance lease receivables
• Residual asset risk disclosures

Why Ind AS 116 Matters

Ind AS 116 gives stakeholders a clearer view of lease obligations, asset utilization, leverage, and profitability.

It is especially important for industries such as:

• Retail
• Aviation
• Logistics
• Telecom
• Hospitality
• Manufacturing

Conclusion

Ind AS 116 significantly changed lease accounting for lessees by bringing most leases onto the balance sheet. Lessor accounting remains similar to previous standards, but lease classification continues to be critical.

Understanding the difference between Lessee vs Lessor Accounting under Ind AS 116 helps businesses ensure compliance, accurate reporting, and better financial decisions.