Economics · Lease Accounting under Ind AS 116
An infrastructure company in India intends to lease heavy machinery valued at ₹500 crore for 7 years. The lease term covers 90% of the asset's useful life, and the present value of minimum lease payments exceeds 95% of its fair value. Under Ind AS 116, how should this transaction be primarily classified and recorded on the lessee's balance sheet at commencement?
Verified Solution4 OptionsUpdated: October 2026👁️1 View
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- 1It is classified as an operating lease, where the lessee records lease rent as a straight-line expense without recognizing an asset or liability on the balance sheet.
- 2It is treated as a lease arrangement requiring the lessee to recognize a Right-of-Use (ROU) asset and a corresponding lease liability measured at the present value of lease payments.✓
- 3It is treated as a standard hire-purchase agreement where legal ownership transfers immediately on day one, and the asset is depreciated exclusively by the lessor.
- 4It is classified under the short-term lease exemption of Ind AS 116 because the duration is less than 10 years, requiring no balance sheet recognition.
Correct answer
It is treated as a lease arrangement requiring the lessee to recognize a Right-of-Use (ROU) asset and a corresponding lease liability measured at the present value of lease payments.
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