Page 9 - 6. COMPILER QB - INDAS 116

The amount paid in the current period regarding the land element is Rs. 14,00,000 (Rs. 12,00,000 + Rs.
200,000). Therefore, there is a prepayment of Rs. 1,140,000 (Rs. 14,00,000 – Rs. 2,60,000) at the year
end.

In the next 19 periods, the rental expense will be Rs. 260,000 and the rental payment will be Rs.
200,000. Therefore Rs. 60,000 of the rental pre-payment will reverse in each period. This means that
Rs. 60,000 of the pre-payment will be a current asset, and the balance a non-current asset.
2) The buildings element of the lease will be a finance lease because the lease term is for substantially
all of the useful life of the buildings. The premium apportioned to the building element is Rs. 18,00,000

(Rs. 30,00,000 x 60%) and the annual rental apportioned to the buildings is Rs. 300,000 (Rs. 500,000
x 60%). The initial carrying value of the leased asset in PPE is Rs. 45,00,000 (Rs. 18,00,000 + Rs.
300,000 x 9). Therefore, the annual depreciation charge is Rs. 2,25,000 (Rs. 45,00,000 x 1/20) and the
closing PPE = Rs. 42,75,000 (Rs. 45,00,000 – Rs. 2,25,000). The finance cost in respect of the finance
lease and the closing non-current liability is shown in the working below. The closing current liability is

Rs. 56,300 (Rs. 26,48,400 – Rs. 25,92,100).
Lease liability profile – working
Year ended 31st Bal b/f Finance Cost Lease rental Bal c/f
March Rs.’000 @ 9.2% payment Rs. ’000
Rs. ’000 Rs. ’000
2018 *2,700 248·4 (300) 2,648·4
2019 2,648·4 243·7 (300) 2,592·1
* Balance brought forward is equal to net of lease premium of Rs. 18,00,000 i.e. Rs. 45,00,000 – Rs.
18,00,000 = Rs. 27,00,000.

Q7 (May 20 – 16 Marks)

Company EFG enters into a property lease with Entity H. The initial term of the lease is 10 years with a 5- year
renewal option. The economic life of the property is 40 years and the fair value of the leased property is Rs.50

Lacs. Company EFG has an option to purchase the property at the end of the lease term for Rs.30 lacs. Lease is
paid at the beginning of the year. The first annual payment is Rs.5 lacs with an increase of 3% every year

thereafter. The implicit rate of interest is 9.04%. Entity H gives Company EFG an incentive of Rs. 2 lacs
(payable at the beginning of year 2), which is to be used for normal tenant improvement.

Company EFG is reasonably certain to exercise that purchase option. How would EFG measure the right-of-use

asset and lease liability over the lease term?
SOLUTION

As per Ind AS 116, Company EFG would first calculate the lease liability as the present value of the annual lease payments, less

the lease incentive paid in year 2, plus the exercise price of the purchase option using the rate implicit in the lease of

approximately 9.04%.
PV of lease payments, less lease incentive (W.N. 1) Rs. 37,39,648
PV of purchase option at end of lease term (W.N. 2) Rs. 12,60,000

Total lease liability Rs. 49,99,648 or Rs. 50,00,000
(approx.)

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