Page 12 - 6. COMPILER QB - INDAS 116

SOLUTION

In the given case, Lessee calculates the ROU asset and the lease liabilities before modification as follows:
Lease Liability ROU asset

Initial value Lease Interest Closing Initial Depreciation Closing
Year
payments expense @ balance Value balance
8%
a b c = a x 8% d = a-b + c e f g
1 4,02,600* 60,000 32,208 3,74,808 4,02,600 40,260 3,62,340

2 3,74,808 60,000 29,985 3,44,793 3,62,340 40,260 3,22,080
3 3,44,793 60,000 27,583 3,12,376 3,22,080 40,260 2,81,820
4 3,12,376 60,000 24,990 2,77,366 2,81,820 40,260 2,41,560

5 2,77,366 60,000 22,189 2,39,555 2,41,560 40,260 2,01,300
6 2,39,555 2,01,300

* Initial value of ROU asset and lease liability = Annual lease payment x annuity factor @ 8%
= 60,000 x 6.71 = Rs. 4,02,600

At the effective date of the modification (at the beginning of Year 6), Lessee remeasures the lease liability based on:

(a) a five-year remaining lease term,

(b) annual payments of Rs. 35,000 and

(c) Lessee’s incremental borrowing rate of 6% p.a.
Present value of modified lease = Annual lease payment x annuity factor @ 6% = 35,000 x 4.212 = 1,47,420
Lessee determines the proportionate decrease in the carrying amount of the ROU Asset on the basis of the remaining
ROU Asset (i.e., 3,000 square metres corresponding to 50% of the original ROU Asset).
50% of the pre-modification ROU Asset (Rs. 2,01,300) is Rs. 1,00,650
50% of the pre-modification lease liability (Rs. 2,39,555) is Rs. 1,19,777.50.

Consequently, Lessee reduces the carrying amount of the ROU Asset by Rs. 1,00,650 and the carrying amount of the
lease liability by Rs. 1,19,777.50. Lessee recognises the difference between the decrease in the lease liability and the
decrease in the ROU Asset (Rs. 1,19,777.50 – Rs. 1,00,650 = Rs. 19,127.50) as a gain in profit or loss at the effective date
of the modification (at the beginning of Year 6).
Lessee recognises the difference between the remaining lease liability of Rs. 1,19,777.50 and the modified lease liability of

Rs. 1,47,420 (which equals Rs. 27,642.50) as an adjustment to the ROU Asset reflecting the change in the consideration
paid for the lease and the revised discount rate.

Q9 (MTP Nov. 21 – 16 Marks)

A retailer (lessee) entered into 3-year lease of retail space beginning at 1st April 20X1 with three annual lease

payments of Rs. 2,00,000 due on 31st March 20X2, 20X3 and 20X4, respectively. The lease is classified as an
operating lease under the erstwhile, accounting standard. The retailer initially applies Ind AS 116 for the first

time in the annual period beginning at 1st April 20X3. The incremental borrowing rate at the date of the initial

application (i.e., 1st April 20X3) is 10% p.a. and at the commencement of the lease (i.e., 1st April 20X1) was
12% p.a. The ROU asset is subject to straight-line depreciation over the lease term. Assume that no practical

6.11