Assurance Gazette – November 2024 Edition

This Assurance Gazette article provides insights into the Companies (Indian Accounting Standards) Second Amendment Rules, 2024, specifically addressing the revised Ind AS 116 on lease accounting. The amendments significantly impact sale and leaseback transactions, clarifying their financial reporting treatment. The article explains the key changes, including the prohibition on recognizing gains on retained assets, and offers a clear illustrative example to aid understanding and compliance. Further, this edition of Gazette also captures, the revised classification criteria for non-company entities regarding the applicability of Accounting Standards (AS). This assures streamlining the entity classification structure to ensure a more straightforward application of AS. 

ICAI Revises Classification Criteria for Non-Company Entities for Accounting Standards (AS) 

Introduction The Institute of Chartered Accountants of India (ICAI) has revised the criteria for the classification of non-company entities for the applicability of Accounting Standards, effective for accounting periods commencing on or after April 1, 2024. Non-company entities are now categorized as Micro, Small, and Medium-Sized Entities (MSMEs) or Large Entities. The announcement also aligns terminology, replacing “Small and Medium Enterprises (SMEs)” with “MSMEs” and reclassifying Level I to Level IV entities under the new scheme. This revised framework supersedes the 2021 criteria announcement and earlier related guidelines, providing clarity and easing compliance for smaller non-company entities. This announcement is not applicable to non-company entities that may be required to adhere to Indian Accounting Standards (Ind AS) or Accounting Standards (AS) as mandated by relevant regulatory requirements governing such entities. 

Ind AS 116: A Closer Look at the Amendments and an Illustrative Example 

Introduction  

The Companies (Indian Accounting Standards) Second Amendment Rules, 2024, have brought certain changes to Ind AS 116, the standard governing lease accounting. These amendments, focusing primarily on sale and leaseback transactions, aim to enhance clarity and accuracy in financial reporting.  

Key Amendments in Ind AS 116  

The core focus of the amendment is on sale and leaseback transactions, a common practice where a company sells an asset and then leases it back for continued use. The amendments introduce clearer guidelines on how these transactions should be reflected in financial statements, particularly concerning the right-of-use assets and lease liabilities. A major change is the prohibition against recognizing gains or losses on the portion of the asset the seller-lessee retains for use. This ensures that companies cannot artificially boost their profits by recognizing gains on assets they still use, preventing manipulation of financial results and ensuring a more accurate reflection of a transaction’s economic impact. The amendment also introduces stricter rules on how lease payments and revised lease payments should be calculated. Companies must now ensure that their leaseback financial reporting reflects the right-of-use assets and lease liabilities in a balanced and consistent way, aligning the recognition of these payments with the actual economic value retained by the company. These changes are set to take effect for annual reporting periods starting on or after April 1, 2024, giving businesses time to prepare for compliance while ensuring consistent application of the updated standards.