Page 6 - 6. COMPILER QB - INDAS 116

Interest at the rate of 5% will be accounted for in profit and loss at average rate of Rs.69 (i.e., USD 2,165
x 69) =Rs. 1,49,385.
Particulars Dr. (Rs.) Cr. (Rs.)
Interest Expense Dr. 1,49,385
To Lease liability 1,49,385
Lease payment would be accounted for at the reporting date exchange rate, i.e. Rs.70 at the end of year 1
Particulars Dr. (Rs.) Cr. (Rs.)
Lease liability Dr. 7,00,000
To Cash 7,00,000

As per the guidance above under Ind AS 21, the lease liability will be restated using the reporting date
exchange rate i.e., Rs.70 at the end of Year 1. Accordingly, the lease liability will be measured at
Rs.24,82,550 (35,465 x Rs. 70) with the corresponding impact due to exchange rate movement of Rs.
88,765 (24,82,550 – (29,44,400 + 1,49,385 – 700,000) taken to profit and loss.

At the end of year 1, the ROU asset will be measured as under:
Year Operating Balance (Rs.) Depreciation (Rs.) Closing Balance (Rs.)
1 29,44,400 5,88,880 23,55,520

Q5 (Nov. 21)

st
The Company has entered into a lease agreement for its retail store as on 1 April, 20X1 for a period of 10
years. A lease rental of Rs. 56,000 per annum is payable in arrears. The Company recognized a lease liability
st
of Rs. 3,51,613 at inception using an incremental borrowing rate of 9.5% p.a. as at 1 April 20X1. As per the
terms of lease agreement, the lease rental shall be adjusted every 2 years to give effect of inflation.
Inflation cost index as notified by the Income tax department shall be used to derive the lease payments.
Inflation cost index was 280 for financial year 20X1-20X2 and 301 for financial year 20X3-20X4. The
current incremental borrowing rate is 8% p.a. Show the Journal entry at the beginning of year 3, to
account for change in lease.

SOLUTION

As per para 27 (b) of Ind AS 116, variable lease payments that depend on an index or a rate, are initially
measured using the index or rate as at the commencement date.
At the beginning of the third year, Lessee remeasures the lease liability at the present value of eight

payments of Rs. 60,200 discounted at an original discount rate of 9.5% per annum as per para 43 of Ind
AS 116.

Year Revised lease rental Discount factor @ 9.5% Present value
3 [(56,000 / 280) x 301] = 60,200 0.913 54,963
4 60,200 0.834 50,207
5 60,200 0.762 45,872
6 60,200 0.696 41,899
7 60,200 0.635 38,277

8 60,200 0.580 34,916
9 60,200 0.530 31,906
10 60,200 0.484 29,137
3,27,127

6.5