Lessee accounting explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
Under Ind AS 116 a lessee no longer keeps most leases off the balance sheet. On the day the lease starts, the company records a right-of-use asset and a lease liability, and from then on charges depreciation and interest instead of a single rent line. This guide takes the paragraphs in order and then works a five-year office lease from first entry to the last.
A contract is a lease if it gives the right to control the use of an identified asset for a period of time in exchange for consideration (paragraph 9). At the commencement date the lessee measures the lease liability at the present value of unpaid lease payments and the right-of-use asset at cost, which starts from that liability (paragraphs 22 to 26). Afterwards the liability grows by interest and falls by payments, and the asset is depreciated, so the expense is front-loaded compared with a straight-line rent.
Ind AS as on 1 April 2025 (ICAI Compendium of Ind AS 2025-26, the standards notified under the Companies (Indian Accounting Standards) Rules, 2015). Amendments notified after 1 April 2025 are not reflected in this article and should be checked on mca.gov.in. For the Companies Act side of who prepares Ind AS accounts, see Schedule III and the format of financial statements. Lease registers and schedules like the one below are part of financial statement preparation for an Ind AS company.
What the paragraphs require
| Paragraph | Requirement | What it means in practice |
|---|---|---|
| 9 | Assess at inception whether the contract is, or contains, a lease | Look for an identified asset and for control of its use, not for the word "lease" in the title |
| 5-8 | A lessee may elect not to apply the recognition rules to short-term leases and low-value assets | Expense the payments on a straight-line or other systematic basis (paragraph 6); the short-term election is by class of asset, the low-value election lease by lease (paragraph 8) |
| 12-15 | Separate lease and non-lease components, unless the practical expedient is used | Allocate the price on relative stand-alone prices (paragraph 13); services such as housekeeping go to other standards |
| 18-21 | Lease term = non-cancellable period plus extension options reasonably certain to be used and termination options reasonably certain not to be used | A rent holiday sits inside the lease term (paragraph B36) |
| 22-24 | Recognise a right-of-use asset and a lease liability at commencement; asset at cost | Cost = liability + payments made before commencement - incentives + initial direct costs + dismantling estimate |
| 26-27 | Liability = present value of payments not yet paid, at the rate implicit in the lease or else the incremental borrowing rate | Fixed payments, index-linked payments, residual value guarantees, a purchase option if reasonably certain, termination penalties if the term assumes termination |
| 30-32 | Cost model: depreciate from commencement to the earlier of useful life and lease term | Straight line is usual; use the asset's useful life only if ownership passes or a purchase option is certain |
| 36-38 | Liability rises by interest at a constant rate and falls by payments; remeasure on reassessment | Interest and variable payments outside the liability go to profit or loss |
The method
- Decide whether there is a lease. Check for an identified asset, the right to obtain substantially all the benefits and the right to direct its use (paragraphs 9 to 11 and B9 onwards). Reassess only if the contract terms change.
- Separate components. Split the price into lease and non-lease parts, or use the expedient in paragraph 15 by class of asset.
- Fix the lease term. Start with the non-cancellable period, then add or remove optional periods using the economic-incentive factors in paragraphs B37 to B40.
- List the lease payments under paragraph 27, net of incentives receivable.
- Choose the discount rate (paragraph 26): the implicit rate if it can be readily determined, otherwise the incremental borrowing rate.
- Discount to get the liability and add to it the other cost elements of paragraph 24 to get the asset.
- Run the schedule each period: interest, payment, closing liability, depreciation (paragraphs 30 to 37).
Where a company applies AS rather than Ind AS, the lease rules are different; our AS 19 guide covers them. The overview of Ind AS 116 gives the standard in outline.
Worked example: an office lease
The entity and all figures in this example are invented for illustration.
Kaveri Tools Limited takes an office floor on a five-year non-cancellable lease starting on 1 April of Year 1. The landlord gives a six-month rent holiday and rent of Rs 12,00,000 a year after that, so the payments, each made on the last day of the year, are Rs 6,00,000 for Year 1 and Rs 12,00,000 for each of Years 2 to 5. There is no extension option the company is reasonably certain to use, no residual value guarantee and no incentive receivable. The company pays a broker Rs 1,50,000 on signing (an initial direct cost). The implicit rate is not available, so the incremental borrowing rate of 10 per cent a year is used (assumed, for arithmetic only).
Step 1: lease term (paragraphs 18 and B36). Five years. The rent holiday is part of it.
Step 2: present value (paragraph 26). Discount factors are shown to four decimals; the present values are computed on unrounded factors and rounded to the rupee.
| Year-end | Payment (Rs) | Factor at 10% | Present value (Rs) |
|---|---|---|---|
| 1 | 6,00,000 | 0.9091 | 5,45,455 |
| 2 | 12,00,000 | 0.8264 | 9,91,736 |
| 3 | 12,00,000 | 0.7513 | 9,01,578 |
| 4 | 12,00,000 | 0.6830 | 8,19,616 |
| 5 | 12,00,000 | 0.6209 | 7,45,106 |
| Total | 54,00,000 | 40,03,491 |
Step 3: right-of-use asset (paragraph 24). 40,03,491 + 1,50,000 broker cost = Rs 41,53,491. No payment was made before commencement and there is no dismantling obligation.
Step 4: liability schedule (paragraphs 36 and 37). Interest is 10 per cent of the opening balance, rounded to the rupee; the Year 5 interest is the balancing figure (it differs by Rs 2 from the rounded computation).
| Year | Opening (Rs) | Interest (Rs) | Payment (Rs) | Closing (Rs) |
|---|---|---|---|---|
| 1 | 40,03,491 | 4,00,349 | 6,00,000 | 38,03,840 |
| 2 | 38,03,840 | 3,80,384 | 12,00,000 | 29,84,224 |
| 3 | 29,84,224 | 2,98,422 | 12,00,000 | 20,82,646 |
| 4 | 20,82,646 | 2,08,265 | 12,00,000 | 10,90,911 |
| 5 | 10,90,911 | 1,09,089 | 12,00,000 | Nil |
Step 5: depreciation (paragraph 32). The asset is written off over the five-year lease term: Rs 8,30,698 a year for Years 1 to 4 and Rs 8,30,699 in Year 5 (total Rs 41,53,491).
Step 6: entries.
| Particulars | Debit (Rs) | Credit (Rs) |
|---|---|---|
| 1 April, Year 1 Right-of-use asset | 41,53,491 | |
| To Lease liability | 40,03,491 | |
| To Bank (broker) | 1,50,000 | |
| 31 March, Year 1 Finance cost | 4,00,349 | |
| To Lease liability | 4,00,349 | |
| Lease liability | 6,00,000 | |
| To Bank | 6,00,000 | |
| Depreciation on right-of-use asset | 8,30,698 | |
| To Right-of-use asset (accumulated depreciation) | 8,30,698 |
Step 7: profit and loss pattern.
| Year | Depreciation (Rs) | Interest (Rs) | Total charge (Rs) | Straight-line rent of the old approach (Rs) |
|---|---|---|---|---|
| 1 | 8,30,698 | 4,00,349 | 12,31,047 | 10,80,000 |
| 2 | 8,30,698 | 3,80,384 | 12,11,082 | 10,80,000 |
| 3 | 8,30,698 | 2,98,422 | 11,29,120 | 10,80,000 |
| 4 | 8,30,698 | 2,08,265 | 10,38,963 | 10,80,000 |
| 5 | 8,30,699 | 1,09,089 | 9,39,788 | 10,80,000 |
| Total | 41,53,491 | 13,96,509 | 55,50,000 | 54,00,000 |
Check. Total charge Rs 55,50,000 = total payments Rs 54,00,000 + broker cost Rs 1,50,000. The liability closes at nil. The expense over the lease is the same as the cash cost; only the timing differs, with more charged in the early years.
At the end of Year 1 the liability of Rs 38,03,840 is split for the balance sheet: Rs 8,19,616 is the principal due within twelve months (the Year 2 payment less the Year 2 interest) and Rs 29,84,224 is the rest. The split between current and non-current is a Schedule III matter; our post on right-of-use assets and balance sheet presentation covers it.
Presentation and disclosure
Paragraph 47 lets a lessee show right-of-use assets and lease liabilities as separate lines or include them in the line where the owned asset would sit, with a disclosure of which lines. Paragraph 49 requires interest on the lease liability to be shown apart from depreciation, as part of finance costs. Paragraph 50 puts the principal and interest payments in financing activities, and short-term, low-value and variable payments outside the liability in operating activities. The disclosure paragraphs follow paragraph 50 in the standard.
Common mistakes
- Treating the rent holiday as zero cost and starting the term after it: the term starts at the commencement date (paragraph B36).
- Leaving initial direct costs out of the asset, or capitalising them into the liability.
- Discounting at the company's borrowing rate on its latest term loan instead of the rate for a similar term, security and economic environment.
- Forgetting to reassess the term after a significant event within the lessee's control (paragraph 20).
- Applying the short-term exemption to a lease that was extended without treating it as a new lease (paragraph 7).
Need help with lease accounting?
If your company is moving its leases onto the balance sheet, or needs a lease register, schedules and entries it can defend at audit, our team can support the work through financial statement preparation. We build the workings so that each figure ties to a paragraph.
Key takeaways
- Assess every contract for an identified asset and control of its use before applying the lease rules.
- The lease term includes any rent holiday and the optional periods the company is reasonably certain to use.
- Liability = present value of unpaid payments; asset = liability plus payments made, direct costs and any dismantling estimate, less incentives.
- Interest and depreciation replace rent, so the early years carry more expense.
- Principal and interest both go to financing activities in the cash flow statement.
Read next
- Lessor accounting, lease modifications and sale and leaseback under Ind AS 116
- ITFG clarifications on Ind AS 116: lease term, land leases, escalating rentals and transition
- Right-of-use assets under Ind AS 116: balance sheet presentation
- AS 19 Leases: finance lease v operating lease
Disclaimer: Based on the Indian Accounting Standards as on 1 April 2025 (ICAI Compendium of Ind AS 2025-26, the standards notified under the Companies (Indian Accounting Standards) Rules, 2015) and, where named, the ITFG clarification bulletins of ICAI, as consulted on 4 October 2026. The worked example uses invented figures. Amendments notified after 1 April 2025 should be checked on mca.gov.in. This article is general information, not legal advice; check the official text before acting.