Page 4 - 6. COMPILER QB - INDAS 116

finance lease then lessor Jeevan India Ltd. shall recognise assets held under a finance lease in their
balance sheets and present them as a receivable at an amount equal to the net investment in the lease.
The recognition of finance income shall be based on a pattern reflecting a constant periodic rate of return

on the lessor’s net investment in the finance lease.

Q3 (Nov. 20)

Entity X (p) entered into a lease agreement (‘lease agreement’) with Entity Y (lessor) to lease an entire
floor of a shopping mall for a period of 9 years. The monthly lease rent is Rs. 70,000. To carry out its
operations smoothly, Entity X simultaneously entered into another agreement (‘facilities agreement’) with

Entity Y for using certain other facilities owned by Entity Y such as passenger lifts, DG sets, power supply
infrastructure, parking space etc., which are specifically mentioned in the agreement, for monthly service

charges amounting to Rs. 1,00,000. As per the agreement, the ownership of the facilities shall remain with
Entity Y. Lessee's incremental borrowing rate is 10%.

The facilities agreement clearly specifies that it shall be co-existent and coterminous with ‘lease agreement’.

The facility agreement shall stand terminated automatically on termination or expiry of ‘lease agreement’.

Entity X has assessed that the stand-alone price of ‘lease agreement’ is Rs. 1,20,000 per month and stand-
alone price of the ‘facilities agreement’ is Rs. 80,000 per month. Entity X has not elected to apply the

practical expedient in paragraph 15 of Ind AS 116 of not to separate non-lease component(s) from lease
component(s) and accordingly it separates non-lease components from lease components.

How will Entity X account for lease liability as at the commencement date?
SOLUTION

Entity X identifies that the contract contains lease of premises and non-lease component of facilities

availed. As Entity X has not elected to apply the practical expedient as provided in paragraph 15, it will
separate the lease and non-lease components and allocate the total consideration of Rs. 1,70,000 to the
lease and non-lease components in the ratio of their relative stand-alone selling prices as follows:

Particulars Stand-alone % of total Stand- Allocation of
Prices alone Price consideration
Rs. Rs.

Building rent 1,20,000 60% 1,02,000
Service charge 80,000 40% 68,000
Total 2,00,000 100% 1,70,000

As Entity X's incremental borrowing rate is 10%, it discounts lease payments using this rate & the lease
liability at the commencement date is calculated as follows:

Year Lease Payment Present value Present value of
(A) factor @ 10% lease payments (A
(B) X B = C)
Year 1 1,02,000 .909 92,718
Year 2 1,02,000 .826 84,252

6.3