Page 20 - 6. COMPILER QB - INDAS 116

2. Ted is granted a rent concession by the lessor whereby the lease payments for the period October 2020 to
December 2020 are deferred. Three months are added to the end of the lease term at same monthly rent:
(a) condition is met since revised consideration in the lease is substantially the same as the original

(b) condition is met since the rent concession only reduces lease payments originally due in 2020 – i.e. before
30th June 2021.
(c) condition is met since the lessee assesses that three-month extension at the end of the lease term is with
substantially the same lease payments. Hence, it would not constitute a substantive change.
Since, the rent concession is a direct consequence of COVID-19 and all three conditions are met, rent concession is

eligible for application of practical expedient in this case.

3. Lessor offers to reduce monthly rent by 50% for the months October 2020 to March 2021 on the condition

that its space is reduced from 2,000 sqm to 1,500 sqm:
The rent concession does not satisfy the criteria to apply the practical expedient because out of the listed eligibility
criteria given in Ind AS 116, there is a substantive change to the terms and conditions of the lease as there is a change
in the scope of lease by reducing the space from 2,000 sqm to 1,500 sqm. Therefore, Ted is not permitted to apply the

practical expedient.

Q13 (December 21 – 10 Marks)

 Jakob ltd. entered into a contract for lease of retail store with Entity J on January 01/01/2018. The initial
term of the lease is 6 years with a renewal option of further 2 years. The annual payments for initial
term and renewal term is Rs 2,80,000 and Rs 3,50,000 respectively.
 The annual lease payment will increase based on the annual increase in the CPI at the end of the

preceding year. For example, the payment due on 01/01/2019 will be based on the CPI available at
31/12/2018.
 Jakob Ltd’s incremental borrowing rate at the lease inception date and as at 01/01/2021 is 8% and 10%

respectively and the CPI at lease commencement date and as at 01/01/2021 is 250 and 260 respectively.
 At the lease commencement date, Jakob Ltd did not have a significant economic incentive to exercise the
renewal option. In the first quarter of 2021, Jakob Ltd installed unique lease improvements into the retail

store with an estimated five-year economic life.
 Jakob Ltd determined that it would only recover the cost of the improvements if it exercises the renewal
option, creating a significant economic incentive to extend.

Is Jakob Ltd required to remeasure the lease in the first quarter of 2021?

Suggested Solution:

(ICAI’s Suggested answer were not released till finalization of this book)
Since Jakob Ltd is now reasonably certain that it will exercise its renewal option, it is required to remeasure

the lease in the first quarter of 2021.

6.19