Under the old standard, a company could lease an aircraft for fifteen years and show nothing on its balance sheet. The obligation existed, the payments were contractually committed, and analysts had to dig into the notes to find them. Ind AS 116 ended that arrangement — and the transition made several Indian companies look considerably more leveraged overnight.
The Core Change
Ind AS 17 required lessees to classify every lease as either a finance lease or an operating lease, with completely different accounting for each.
| Ind AS 17 — Finance lease | Ind AS 17 — Operating lease | |
|---|---|---|
| Balance sheet | Asset and liability recognised | Nothing recognised |
| P&L | Depreciation + interest | Straight-line rent expense |
| Test | Transfers substantially all risks and rewards of ownership | Everything else |
Ind AS 116 abolishes this distinction for lessees. A single model now applies: recognise a right-of-use asset and a lease liability for almost every lease.
Side by Side
| Ind AS 17 | Ind AS 116 | |
|---|---|---|
| Lessee classification | Finance vs operating | Single model |
| Operating leases on balance sheet | No | Yes |
| Lessee P&L for former operating leases | Straight-line rent | Depreciation + interest |
| Expense profile | Level | Front-loaded |
| EBITDA | Rent reduces it | Higher — rent removed |
| Operating cash flow | Full rent outflow | Higher — principal moves to financing |
| Exemptions | None needed | Short-term and low-value |
| Lessor accounting | Finance vs operating | Substantially unchanged |
That final row is worth emphasising because it is frequently misstated. Lessors still classify leases as finance or operating and account for them broadly as before. The overhaul applied to lessees.
Why the Old Model Was Replaced
Three problems drove the change:
Structuring. The finance/operating boundary rested on tests that could be engineered around. Contracts were drafted to fall just short of the finance lease criteria, keeping obligations off balance sheet.
Comparability. An airline owning its fleet showed large assets and debt. An airline leasing an identical fleet showed neither. Economically similar businesses looked structurally different.
Analyst adjustments. Users were already capitalising operating leases using crude multiples of annual rent — a rough approximation applied inconsistently. The standard-setters concluded it was better done properly in the accounts.
Transition
On adoption, entities generally applied the modified retrospective approach — recognising the cumulative effect at the date of initial application, without restating comparative information.
This has a lasting analytical consequence. In the year of adoption, the comparative column follows the old standard and the current column follows the new one. Growth rates in debt, EBITDA and operating cash flow across that boundary are not like-for-like.
Anyone building a ten-year financial history for an Indian company that spans FY2019 to FY2020 needs to handle that discontinuity deliberately rather than treating the series as continuous.
Who Was Affected Most
| Sector | Typical impact |
|---|---|
| Retail | Very high — large store portfolios on long leases |
| Aviation | Very high — leased aircraft fleets |
| Hotels | High — leased properties |
| Telecom | High — tower and fibre arrangements |
| Logistics | High — warehouses and vehicles |
| IT services | Moderate — leased office space |
| Manufacturing (asset-owning) | Lower — assets typically owned |
| Banks and NBFCs | Moderate as lessees; lessor books unchanged |
What Did Not Change
- Lessor accounting — the finance/operating classification survives
- Total cash paid — no change to actual rent outflow
- Total expense over the lease term — only the timing profile shifted
- The underlying economics — a leased store is the same store it always was
- Tax treatment — accounting recognition does not by itself alter tax deductibility, which follows tax law
That last point is worth stating plainly. Ind AS 116 is a financial reporting standard. It changed how leases are presented in accounts, not what a company pays or what it can deduct.
Reading Accounts Across the Boundary
Practical steps when analysing a company whose history spans the change:
- Identify the adoption year — generally FY2019-20 for Indian Ind AS companies
- Read the transition note, which states the ROU asset and lease liability recognised on adoption
- Do not compare debt ratios directly across the boundary without adjusting
- Treat EBITDA growth into FY2020 with caution — part of it is presentational
- Check whether peers adopted the same transition approach, since options differed
Key Takeaways
- Ind AS 116 replaced Ind AS 17 from 1 April 2019
- It abolished the finance vs operating distinction for lessees
- Former operating leases now sit on the balance sheet as ROU asset and lease liability
- Lessor accounting is substantially unchanged
- Expense profile became front-loaded; EBITDA and operating cash flow both rose
- Most entities used modified retrospective transition without restating comparatives
- This creates a genuine discontinuity in multi-year financial series
- Retail, aviation, hotels and telecom were affected most
Frequently Asked Questions (FAQ)
Q: What is the main difference between Ind AS 116 and Ind AS 17?
Ind AS 17 let lessees keep operating leases off the balance sheet. Ind AS 116 removes that distinction and requires almost all leases to be recognised as a right-of-use asset and a lease liability. Lessor accounting remains largely as before.
Q: When did Ind AS 116 replace Ind AS 17?
From 1 April 2019, following the Ministry of Corporate Affairs notification. It is the Indian equivalent of IFRS 16, which the IASB issued in January 2016.
Q: Does Ind AS 116 change lessor accounting?
Not substantially. Lessors continue to classify leases as finance or operating and account for them broadly as under Ind AS 17. The single-model change applies only to lessees.
Q: Why did EBITDA increase after Ind AS 116?
Because rent expense was replaced by depreciation and interest, both of which sit below the EBITDA line. The cash paid did not change — only where the cost appears in the profit and loss statement.
Q: Can I compare a company’s FY2019 and FY2020 figures directly?
Not without adjustment. Most entities adopted the modified retrospective approach without restating comparatives, so the two years follow different standards. Debt ratios, EBITDA and operating cash flow are all affected by presentation rather than performance.
Q: Did Ind AS 116 change how much companies actually pay in rent?
No. It is a financial reporting standard. Cash outflow is unchanged, total expense over the lease term is unchanged, and the underlying commercial arrangement is unchanged. Only recognition, presentation and timing shifted.
Q: Which sectors were most affected?
Retail, aviation, hotels, telecom and logistics — businesses that lease large numbers of properties, vehicles or equipment on long terms. Asset-owning manufacturers saw far smaller effects.
Related Reading: