Ind AS · leases

Ind AS 116 leases: accounting entries & the ROU asset.

How Ind AS 116 brings almost every lease onto the lessee's balance sheet — the right-of-use asset, the lease liability, and a full worked office-lease example with an amortisation schedule and journal entries that tie out to the rupee.

Reviewed July 2026
8 min read
CA Anil Agarwal & the TatvaBooks team

What is Ind AS 116?

Ind AS 116 Leases is the Indian Accounting Standard that governs how a lessee (and, separately, a lessor) accounts for lease contracts. Its defining change from the earlier lease accounting model is the removal of the lessee-side distinction between "operating" and "finance" leases: with limited exceptions, every lease is now recognised on the lessee's balance sheet — as a right-of-use (ROU) asset on one side and a lease liability for the obligation to make future lease payments on the other.

A contract (or part of a contract) is a lease if it conveys the right to control the use of an identified asset for a period of time in exchange for consideration. Once that test is met, Ind AS 116 applies unless the lessee elects one of the two available exemptions — short-term leases or low-value asset leases — discussed below.

The framework in plain language

For a lessee, Ind AS 116 works in three steps: measure the lease liability, measure the ROU asset, then run both through the books each period.

Step	What happens
1. Lease liability	Recognised at the present value of the lease payments not yet paid as at the commencement date, discounted using the interest rate implicit in the lease (if readily determinable) or the lessee's incremental borrowing rate (IBR).
2. Right-of-use asset	Initially measured at cost = the initial lease liability + lease payments made at or before commencement + initial direct costs incurred by the lessee + estimated restoration costs − any lease incentives received.
3. Subsequent measurement — liability	Increased each period by interest (unwinding of the discount, on the reducing balance) and reduced by lease payments made — same mechanics as any amortising loan.
4. Subsequent measurement — ROU asset	Depreciated (usually straight-line) over the shorter of the lease term and the asset's useful life, and tested for impairment under Ind AS 36 where indicators exist.
5. Exemptions	A lessee may elect, by class of underlying asset, to expense payments for short-term leases (term of 12 months or less, no purchase option) and leases of low-value assets on a straight-line basis instead — no ROU asset or lease liability is recognised for these.

Two numbers to always confirm before finalising a lease working: the discount rate (IBR) and any lease term judgement (renewal/termination options reasonably certain to be exercised). Both are estimates that materially change the liability and asset amounts, and both are common areas of audit challenge.

Worked example: a 5-year office lease

Facts: a company takes an office on a non-cancellable 5-year lease from 1 April Year 1. Annual rent is ₹12,00,000, payable in advance at the start of each lease year. The company incurs ₹1,00,000 of initial direct costs (legal and agency fees) to execute the lease, paid in cash on commencement. There is no purchase option, no restoration obligation and no lease incentive. The company's incremental borrowing rate is 10% per annum (the rate implicit in the lease is not readily determinable).

Step 1 — measure the lease liability

The lease liability at commencement is the present value of lease payments not yet paid as at that date. Since the first year's rent of ₹12,00,000 is paid immediately on commencement, the liability is measured on the four remaining annual payments (Years 2–5), discounted at 10%:

PV of 4 annual payments of ₹12,00,000, discounted at 10% (payments at the start of Years 2, 3, 4 and 5, i.e. 1, 2, 3 and 4 years from commencement) = ₹38,03,838.54.

Step 2 — measure the ROU asset

ROU asset = lease liability (₹38,03,838.54) + first year's rent paid at commencement (₹12,00,000) + initial direct costs (₹1,00,000) = ₹51,03,838.54.

Step 3 — lease liability amortisation schedule

Interest is charged each year at 10% on the opening liability balance, and the annual payment (made at the start of the following year) is deducted. The schedule below ties out to nil after the fifth and final payment.

Year	Opening liability (₹)	Interest @ 10% (₹)	Payment at start of next year (₹)	Closing liability (₹)
Year 1	38,03,838.54	3,80,383.85	12,00,000.00	29,84,222.39
Year 2	29,84,222.39	2,98,422.24	12,00,000.00	20,82,644.63
Year 3	20,82,644.63	2,08,264.46	12,00,000.00	10,90,909.09
Year 4	10,90,909.09	1,09,090.91	12,00,000.00	0.00
Year 5	0.00	0.00	0.00	0.00

Total interest recognised over the lease term is ₹9,96,161.46 (sum of the interest column) — check: total cash paid over 5 years (₹60,00,000) less the present value of all 5 payments at commencement, before the first payment, (₹50,03,838.54) also equals ₹9,96,161.46. The two routes agree, confirming the schedule ties out.

Step 4 — depreciation on the ROU asset

The ROU asset (₹51,03,838.54) is depreciated straight-line over the 5-year lease term (there is no ownership transfer and no separate shorter useful life): ₹10,20,767.71 per year (₹51,03,838.54 ÷ 5).

Journal entries

On lease commencement (1 April Year 1) — recognise the ROU asset and lease liability, and pay the first rent instalment and initial direct costs:

Date	Particulars	Debit ₹	Credit ₹
1-Apr-Yr1	Right-of-use Asset A/c ... Dr	51,03,838.54
	To Lease Liability A/c		38,03,838.54
	To Bank A/c (first rent, paid in advance)		12,00,000.00
	To Bank A/c (initial direct costs)		1,00,000.00
	(Being ROU asset and lease liability recognised on lease commencement)

Year-end (31 March Year 1) — depreciation and interest accrual for the first year:

Date	Particulars	Debit ₹	Credit ₹
31-Mar-Yr1	Depreciation A/c ... Dr	10,20,767.71
	To Accumulated Depreciation — ROU Asset A/c		10,20,767.71
	(Being SLM depreciation on ROU asset for Year 1, ₹51,03,838.54 ÷ 5)
31-Mar-Yr1	Interest on Lease Liability A/c ... Dr	3,80,383.85
	To Lease Liability A/c		3,80,383.85
	(Being interest accrued on lease liability for Year 1 at 10% on opening balance ₹38,03,838.54)

1 April Year 2 — the second rent instalment is paid and settled against the lease liability (no further interest or expense on the payment itself, since interest for Year 1 was already accrued above):

Date	Particulars	Debit ₹	Credit ₹
1-Apr-Yr2	Lease Liability A/c ... Dr	12,00,000.00
	To Bank A/c		12,00,000.00
	(Being second annual rent paid in advance, at the start of Year 2)

The same pattern — depreciation entry + interest accrual at each year end, payment entry at the start of the following year — repeats for Years 2 through 5, using the opening balances from the amortisation schedule above. By the start of Year 5 the liability is fully extinguished (₹0.00), consistent with the fifth and final rent payment having already been made at the start of that year.

Practical notes and common pitfalls

Front-loaded charge, not a bug. The combined depreciation + interest charge is higher in early years (interest is largest when the liability is largest) and lower in later years, even though the cash rent is level. Flag this to management upfront — the P&L "lease cost" will not match the flat rent figure they are used to seeing under the old operating-lease treatment.
Get the discount rate right and document it. The IBR is a judgement, not a lookup — build a defensible basis (e.g. the company's actual secured borrowing rate for a similar tenor) and keep the working papers. A wrong IBR moves both the ROU asset and the liability, and therefore depreciation, interest, and every ratio computed off the balance sheet.
Reassess the lease term carefully. If renewal or termination options exist and the lessee is "reasonably certain" to exercise (or not exercise) them, that changes the lease term used in both the PV calculation and the depreciation period — and must be reassessed on a trigger event, not just at inception.
Variable payments linked to an index or rate (e.g. rent escalating with CPI) are included in the initial measurement using the rate/index at commencement, then remeasured when the index actually changes — they are not simply expensed as incurred once they are "in-scope" variable payments of that type.
Short-term and low-value exemptions are elections, not automatic. They must be applied consistently by class of asset (short-term) or on a lease-by-lease basis (low-value), and both should be documented as an accounting policy choice — don't apply them inconsistently across similar leases in the same entity.
First-time Ind AS transition needs its own working. A company adopting Ind AS 116 for the first time (whether newly covered by Ind AS, or on first application of the standard) must restate existing operating leases as ROU assets and lease liabilities as at the transition date — this is a distinct exercise from the year-1 accounting shown above, done once at transition.

Keeping the underlying books ready

Ind AS 116 lease workings sit on top of clean underlying books — the fixed asset register, the loan/liability schedules and the trial balance the ROU asset and lease liability get posted into. TatvaBooks keeps that base layer GST-correct and Schedule III-ready from the first entry, so when a lease working like the one above is finalised, posting it and rolling it into the financial statements is a clean drop-in rather than a reconciliation exercise.

Frequently asked questions

What is a right-of-use (ROU) asset under Ind AS 116?

The ROU asset represents the lessee's right to use the underlying leased item for the lease term. It is recognised at initial measurement equal to the initial lease liability, plus any lease payments made at or before the commencement date, plus initial direct costs incurred by the lessee, plus an estimate of restoration/dismantling costs, less any lease incentives received. It is then depreciated — usually on a straight-line basis over the shorter of the lease term and the asset's useful life.

Does Ind AS 116 apply to all leases, including short-term and low-value ones?

No. Ind AS 116 gives lessees two recognition exemptions: short-term leases (lease term of 12 months or less, with no purchase option) and leases of low-value underlying assets. For these, the lessee can continue to expense lease payments on a straight-line (or other systematic) basis to profit or loss, without recognising an ROU asset or lease liability on the balance sheet. The low-value threshold is applied on an absolute basis to the asset when new — verify the current guidance on what qualifies before relying on this exemption for a specific asset.

How is the discount rate for the lease liability determined?

Ind AS 116 requires the lessee to discount lease payments using the interest rate implicit in the lease, if that rate can be readily determined. If it cannot (the usual case for most Indian lessees, since the lessor's fair value and expected residual are rarely known), the lessee uses its own incremental borrowing rate (IBR) — the rate it would have to pay to borrow, over a similar term and with similar security, funds necessary to obtain an asset of similar value in a similar economic environment. Determining the IBR is a judgement call and is often where auditors push back — document the basis clearly.

How does Ind AS 116 change the profit and loss statement compared to the old operating lease treatment?

Under the erstwhile treatment, operating lease rent was a single straight-line expense. Under Ind AS 116, the same lease now generates two separate charges — depreciation on the ROU asset (typically straight-line, so constant each year) and interest on the lease liability (front-loaded, since interest is calculated on a reducing balance). The combined charge is higher in the earlier years of the lease and lower in later years than the old straight-line rent figure, even though total cash paid is unchanged — this is a common reconciliation point when explaining EBITDA changes to management, since both depreciation and interest sit below the EBITDA line.

Is Ind AS 116 the same as AS 19 or the ICAI's lease accounting under the old Accounting Standards?

No. AS 19 (applicable to companies not covered by Ind AS) still classifies leases as either 'operating' or 'finance' from the lessee's side, with only finance leases capitalised. Ind AS 116 removes that distinction for lessees entirely — with limited exceptions (short-term and low-value leases), every lease is brought onto the balance sheet as an ROU asset and a lease liability. A company transitioning into Ind AS for the first time needs a dedicated exercise to restate its existing operating leases under Ind AS 116 as at the transition date.

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