Lease Testing FAQs: Ind AS 116 Audit Procedures [2026]

Published: April 4, 2026 | Category: FAQ | Read Time: 10 minutes | Author: CORAA Team

---

Lease Fundamentals

Q1: What is Ind AS 116 and when does it apply?

A: Ind AS 116 (Leases) requires companies to recognize most leases on the balance sheet (operating and finance leases).

Key Requirement: Right-of-Use (ROU) asset and lease liability recorded.

Effective Date: April 1, 2019 (currently in effect)

Scope:

• Applies to: All leases (equipment, vehicles, property, etc.)
• Exemptions: Leases <12 months; low-value assets (<₹3-5 lakh per company policy)

Example: Company leases office space for 5 years at ₹10 lakh/year. Under Ind AS 116:

• ROU asset recognized: ~₹40 lakh (present value of lease payments)
• Lease liability recognized: ~₹40 lakh
• Monthly: Depreciation on ROU + Interest on liability

Pre-Ind AS 116: Leases were off-balance sheet (operating lease); only rent expense recognized.

---

Q2: What are the key Ind AS 116 audit risks?

A: Common audit risks:

Risk 1: Lease Identification

• Management fails to identify all leases
• "Hidden" leases embedded in service contracts
• Example: Equipment maintenance contract with transfer of control

Risk 2: Classification

• Incorrectly classifying as finance vs. operating (pre-IFRS 16)
• Under Ind AS 116: Almost all are finance leases (ROU model)

Risk 3: Measurement

• ROU asset calculation errors
• Lease term determination (exercise options not considered)
• Discount rate selection (inappropriate rate used)

Risk 4: Termination/Modification

• Lease modifications not properly accounted for
• Terminated leases not derecognized

Risk 5: Disclosures

• Incomplete Ind AS 116 disclosures
• Missing sensitivity analysis
• Missing maturity analysis

---

Lease Identification & Testing

Q3: How do we identify all leases for Ind AS 116 testing?

A: Systematic identification approach:

Step 1: Inventory/Fixed Assets Review

• Review significant contracts for embedded leases
• Example: "Equipment maintenance contract" may include lease

Step 2: Contract Review

• Scan all material contracts for lease language
• Keywords: "rent," "lease," "hire," "sublease," "use and occupancy"
• NLP tools can automate scanning

Step 3: Management Inquiry

• Ask CFO/management: "What leases exist?"
• Request lease schedule from facilities/procurement

Step 4: Analytical Procedures

• Review rent expense trend
• Compare to prior years
• Investigate unusual changes

Step 5: Lease Schedule Preparation

• Compile all identified leases
• Document lessor, terms, amount
• Classify: Operating equipment, vehicles, property, etc.

Per ISA 330 (Responses to Assessed Risks), comprehensive lease identification is required.

---

Q4: What constitutes a "lease" under Ind AS 116?

A: Per Ind AS 116, a lease exists when:

1. Identified Asset: Contract involves a specific asset (e.g., office space, forklift)
2. Right of Control: Lessee has exclusive use during lease period
3. Payment Obligation: Consideration paid for the right

Examples of Leases:

• Office space rental ✓ (all 3 criteria met)
• Equipment lease ✓
• Vehicle lease ✓
• Sublease ✓

NOT Leases:

• Service contracts (e.g., "maintenance service") ✗ (no identified asset)
• Month-to-month rentals (generally <12 months, exemption applies) ✗
• Low-value assets ✗ (exemption available)

---

Q5: When are the "low-value asset" exemption?

A: Ind AS 116 exemption: Leases of low-value assets can be expensed (not capitalized).

Definition of Low-Value:

• New asset value <₹3-5 lakh (company policy varies)
• Examples: Office furniture (<₹3L), laptop lease (<₹1L), printer (<₹2L)

Audit Procedure:

• Document company's low-value threshold
• Review lease schedule; exclude low-value items
• Verify items below threshold not capitalized

Common Error: Company fails to apply exemption; capitalizes all leases unnecessarily.

---

ROU Asset & Liability Calculation

Q6: How do we test ROU asset calculation?

A: ROU testing checklist:

ROU Asset Calculation Testing

1. LEASE IDENTIFICATION ✓
   ☐ Lease agreement obtained
   ☐ Lease terms clearly identified
   ☐ Commencement date confirmed

2. LEASE TERM DETERMINATION ✓
   ☐ Initial lease term confirmed (e.g., 5 years)
   ☐ Renewal options considered
     - Is renewal likely? (per management judgment)
     - If likely, include in lease term
   ☐ Termination options considered
   ☐ Lease term documented (e.g., "5 years including likely renewal")

3. LEASE PAYMENTS IDENTIFICATION ✓
   ☐ Fixed lease payments: ₹10L/year × 5 years = ₹50L
   ☐ Variable payments: None / Yes (describe)
   ☐ Estimated residual value: ₹0 / Yes (specify)
   ☐ Total future lease payments: ____

4. DISCOUNT RATE SELECTION ✓
   ☐ Lessor's implicit rate: Not available / ___% (if available)
   ☐ Lessee's incremental borrowing rate: 8.5% (calculated)
   ☐ Rate used: 8.5%
   ☐ Reasonableness check: Compare to company's borrowing rate

5. PV CALCULATION ✓
   ☐ Initial measurement:
     - Year 1: ₹10L ÷ 1.085 = ₹9.22L
     - Year 2: ₹10L ÷ (1.085)² = ₹8.49L
     - Year 3-5: Similar
     - Total PV = ₹40.5L
   ☐ Initial direct costs: + ₹2L (if any)
   ☐ ROU Asset = ₹42.5L

6. INITIAL LIABILITY RECOGNITION ✓
   ☐ Lease liability at commencement: ₹42.5L
   ☐ Compare to fixed assets: ROU ₹42.5L recorded
   ☐ Compare to liabilities: Lease liability ₹42.5L recorded

7. SUBSEQUENT MEASUREMENT ✓
   ☐ Interest expense: Year 1 = ₹42.5L × 8.5% = ₹3.61L
   ☐ Principal payment: Year 1 = ₹10L - ₹3.61L = ₹6.39L
   ☐ Lease liability (end Year 1) = ₹42.5L - ₹6.39L = ₹36.11L
   ☐ Reconcile to balance sheet

---

Q7: What's the most common ROU calculation error?

A: Incorrect discount rate selection.

Common Error: Using company's borrowing rate (e.g., bank loan rate: 6%) vs. actual lease rate (8.5%)

Impact: ROU asset overstated if incorrect rate used.

Audit Procedure:

• Obtain lease agreement (often includes implicit rate)
• If implicit rate unavailable, calculate lessee's incremental borrowing rate
• Verify rate is reasonable for the lease

Example:

• Incorrect: ROU = ₹10L × 5 / (1.06)^2.5 = ₹43.5L ✗
• Correct: ROU = ₹10L × 5 / (1.085)^2.5 = ₹40.5L ✓

---

Lease Classification & Modification

Q8: Are there different lease classifications under Ind AS 116?

A: No. Ind AS 116 eliminated the "operating vs. finance lease" distinction.

Old Model (Pre-Ind AS 116):

• Finance lease (asset/liability on balance sheet)
• Operating lease (off-balance sheet)

New Model (Ind AS 116):

• All leases → ROU model (on-balance sheet)
• Exception: Short-term (<12 months) and low-value

Implication: All material leases now capitalized; management can't "hide" leases off-balance sheet.

---

Q9: How do we test lease modifications?

A: Lease modification testing:

Example: Original 5-year lease; Year 2 extended to 7-year.

Audit Procedure:

• Obtain modification agreement
• Identify changes (lease term extended, payments adjusted)
• Assess accounting treatment:
  • Modification as new lease: Discontinue original; record new ROU/liability
  • Modification of existing lease: Recalculate ROU/liability retroactively

Common Error: Company fails to adjust ROU for modifications.

---

Lease Terminations & Disclosures

Q10: How do we test lease terminations?

A: Lease termination testing:

Example: 5-year lease terminated in Year 3 (2 years remaining).

Audit Procedure:

• Obtain termination agreement
• Calculate gain/loss:
  • ROU asset (remaining): ₹15L
  • Less: Lease liability (remaining): ₹12L
  • Less: Termination fee: ₹2L
  • Loss on termination: ₹5L

Accounting Treatment:

• Remove ROU asset from fixed assets
• Remove lease liability from liabilities
• Record termination loss in P&L

Verification:

• Fixed assets after termination accurate
• Liabilities after termination accurate
• Termination loss reasonable

---

Q11: What Ind AS 116 disclosures are required?

A: Mandatory Ind AS 116 disclosures:

LEASE DISCLOSURES (Ind AS 116)

1. NATURE OF LEASES
   - Type of leases (property, equipment, vehicles, etc.)
   - Lease terms overview

2. MATURITY ANALYSIS
   - Undiscounted lease payments:
     - Year 1: ₹10L
     - Year 2: ₹10L
     - Year 3-5: ₹30L
     - Total: ₹50L

3. FINANCIAL IMPACT
   - ROU Assets (balance sheet): ₹40.5L
   - Lease Liabilities (balance sheet): ₹42.5L (current + non-current)

4. P&L IMPACT
   - Depreciation: ₹8L (Year 1)
   - Interest expense: ₹3.6L (Year 1)

5. CASH FLOW
   - Operating cash flow: Include interest
   - Financing cash flow: Include principal

6. SENSITIVITY ANALYSIS
   - Impact of 1% change in discount rate
   - Example: "If rate were 1% higher, ROU would be ₹2L lower"

Common Error: Incomplete disclosures (missing maturity analysis or sensitivity).

---

Ind AS 116 & NFRA Defensibility

Q12: How does proper Ind AS 116 audit strengthen NFRA defensibility?

A: NFRA expects:

NFRA Inspector:

"Auditor performed comprehensive lease identification (contract review, NLP scanning). Lease schedule documented. ROU calculations tested (lease term, discount rate, PV calculation). Subsequent measurement verified. Year-end reconciliation performed. Ind AS 116 disclosures complete. Audit file demonstrates thorough lease testing per ISA 500 and Ind AS 116."

Defensible Approach:

• Systematic lease identification (contract-by-contract review)
• ROU calculations independently verified
• Discount rate appropriateness confirmed
• Maturity analysis and sensitivity analysis reviewed
• Full disclosure compliance

---

Q13: What are common NFRA findings on lease audits?

A: Common findings:

Finding 1: Hidden Leases Not Identified

• Auditor failed to identify embedded leases in service contracts
• Impact: Assets and liabilities understated

Finding 2: ROU Calculation Errors

• Incorrect discount rate used
• Lease term not properly considered (renewal options omitted)
• Impact: Significant misstatement of ROU assets/liabilities

Finding 3: Incomplete Testing

• Limited lease sample testing
• No independent verification of calculations
• Impact: Undetected errors

Finding 4: Missing Disclosures

• Maturity analysis incomplete
• Sensitivity analysis missing
• Impact: Disclosure deficiency

Mitigation: Comprehensive lease identification and testing per ISA 500.

---

Year-End Lease Testing

Q14: What's the year-end audit procedure for leases?

A: Year-end lease testing procedure:

1. LEASE SCHEDULE RECONCILIATION
   - Obtain lease schedule prepared by client
   - Reconcile to:
     - GL (ROU assets account)
     - GL (Lease liabilities account)
   - Identify additions/disposals during year

2. ADDITIONS TESTING
   - New leases added in year:
     - Verify inception date
     - Verify ROU calculation
     - Verify liability calculation
   - Sample: Test 100% if <10; if >10, test 25% sample

3. DISPOSALS TESTING
   - Leases terminated/expired in year:
     - Verify derecognition date
     - Verify gain/loss calculation
     - Verify removal from GL

4. PERIOD-END VALUATION
   - ROU assets:
     - Verify depreciation calculated correctly
     - Verify impairment tested (if applicable)
   - Lease liabilities:
     - Verify interest expense calculated
     - Verify current/non-current split correct

5. DISCLOSURE VERIFICATION
   - Maturity analysis completed
   - Sensitivity analysis reviewed
   - Reconciliation to GL verified

6. ANALYTICAL PROCEDURE
   - Lease interest (budget vs. actual)
   - Depreciation trend
   - Lease liability trend (declining as paid down)

---

Implementation & Training

Q15: What training should audit teams receive on Ind AS 116?

A: Recommended training:

For Partners (2 hours):

• Ind AS 116 overview
• Key audit risks (identification, calculation, modification)
• Materiality considerations
• NFRA expectations

For Managers (2 hours):

• Ind AS 116 requirements detail
• Lease identification procedures
• ROU calculation walkthrough
• Workpaper standards

For Seniors (1.5 hours):

• Lease identification checklist
• ROU calculation steps
• Workpaper preparation

Recommended Tools:

• Ind AS 116 checklist (per firm)
• Lease calculation spreadsheet template
• Lease testing workpaper

---

Key Takeaways

1. Lease identification is critical. Many "hidden" leases embedded in service contracts; comprehensive contract review required.

2. ROU calculation requires three key inputs: Lease term (including renewal options), lease payments, discount rate.

3. Discount rate selection is common error. Use lessor's implicit rate if available; otherwise, use lessee's incremental borrowing rate.

4. Ind AS 116 eliminated off-balance sheet leases. All material leases now capitalized (no "operating lease" exemption).

5. Disclosures are comprehensive. Maturity analysis, sensitivity analysis, reconciliation all required.

6. NFRA expects thorough lease testing. Contract-by-contract review, independent calculation verification, full disclosure compliance.

7. Document thoroughly. Lease schedule, calculations, disclosures all in audit file.

---

Related Resources

• Lease Accounting Audit: Ind AS 116 Testing Procedures
• Contract NLP: Lease Identification & Testing
• Audit Risk Scorer: Assessment Framework

---

About CORAA

CORAA helps Indian audit firms test leases per Ind AS 116. From lease identification to ROU calculations to disclosure verification, ensure comprehensive lease audit compliance with Ind AS 116.

Learn more: Visit our website

---

Sources

• Ind AS 116: Leases
• ISA 330: The Auditor's Responses to Assessed Risks
• ISA 500: Audit Evidence