Page 10 - 6. COMPILER QB - INDAS 116
P. 10

The right-of-use asset is equal to the lease liability because there is no adjustment required for initial direct costs incurred

        by Company EFG, lease payments made at or before the lease commencement date, or lease incentives received prior to
        the lease commencement date.

        Entity EFG would pass the following journal entry on the lease commencement date.
                           Right-of-use Asset          Dr.           Rs. 50,00,000

                                   To Lease Liability                              Rs. 50,00,000
                           To record ROU asset and lease liability at the commencement date.
        Since the purchase option is reasonably certain to be exercised, EFG would amortize the right-of- use asset over the economic life

        of the underlying asset (40 years). Annual amortization expense would be Rs. 1,25,000 (Rs. 50,00,000 / 40 years)
        Interest expense on the lease liability would be calculated as shown in the following table. This table includes all expected

        cash flows during the lease term, including the lease incentive paid by Entity H and Company EFG’s purchase option.
                           Year       Payment   Principal paid at  Interest paid  Interest expense  Lease Liability

                                               the beginning of the                      (end of the
                                                     year                                   year
                                         a          b= a-c     c = (d of pvs.  d = [(e of pvs.  e = (e of pvs.

                                                                  year)   year- a) x 9.04%]  year + d – a)
                     Commencement                                                         50,00,000
                           Year 1      5,00,000     5,00,000        -         4,06,800    49,06,800

                           Year 2      3,15,000*    (91,800)     4,06,800     4,15,099    50,06,899
                           Year 3      5,30,450     1,15,351     4,15,099     4,04,671    48,81,120
                           Year 4      5,46,364     1,41,693     4,04,671     3,91,862    47,26,618

                           Year 5      5,62,754     1,70,892     3,91,862     3,76,413    45,40,277
                           Year 6      5,79,637     2,03,224     3,76,413    3,58,042     43,18,682
                           Year 7      5,97,026     2,38,984     3,58,042    3,36,438     40,58,094

                           Year 8      6,14,937     2,78,499     3,36,438     3,11,261    37,54,418
                           Year 9     6,33,385      3,22,124      3,11,261    2,82,141    34,03,174

                           Year 10     6,52,387     3,70,246     2,82,141    2,49,213**   30,00,000
                           Year 10    30,00,000    27,50,787     2,49,213*      -            -
                           Total      85,31,940    50,00,000     35,31,940   35,31,940

        *(5,00,000 + increased by 3% - lease incentive paid amounting to 2,00,000)
        **Difference of Rs. 542 (Rs. 2,48,671 and Rs. 2,49,213) is due to rounding of interest expense calculated @ 9.04%.

        Although the lease was for 10 years, the asset had an economic life of 40 years. When Company EFG exercises its purchase
        option at the end of the 10-year lease, it would have fully extinguished its lease liability but continue depreciating the asset

        over the remaining useful life.










                                                                                                         6.9
   5   6   7   8   9   10   11   12   13   14   15