The Hidden Debt: Is Your Balance Sheet Ready for Ind AS 116?

If you think a lease is just a monthly ”rent expense,” your financial ratios are probably outdated.

Ind AS 116 changed that. What was once a clean operating expense (pay rent, book the cost, keep it off the balance sheet) is now a financed purchase sitting squarely on your balance sheet as both an asset and a liability. The implications run from your debt covenants to your EBITDA to how your FP&A team needs to build its forecasts.

The Accounting Shift: No More Off-Balance Sheet

Under the old lease standards, operating leases were easy:

• Pay rent

• Book an expense

• Keep it off the balance sheet

Under Ind AS 116, that simplicity is gone.

The standard now treats every lease as a financed purchase.

What changes?

• Right-of-Use (ROU) Asset

  You recognize the economic right to use the office, warehouse, or equipment.

• Lease Liability

  You recognize the present value of future lease payments as debt.

What you once treated as invisible leverage is now explicit financial risk.

The EBITDA Illusion

This change is not just cosmetic. It fundamentally alters your P&L structure.

Earlier (Pre-Ind AS 116)

• Rent expense

• Classified as Operating Expense (above EBITDA)

Now (Ind AS 116)

• Rent split into:
  • Depreciation (ROU Asset)
  • Interest Expense (Lease Liability)

The result?

• EBITDA improves automatically
• Interest costs rise
• Leverage ratios worsen

EBITDA growth here is accounting-driven, not performance-driven.

The FP&A vs Audit Conflict

This is where friction begins, because compliance and strategy see leases very differently.

Auditor’s Perspective (Backward-Looking)

• Precision and defensibility
• Heavy scrutiny on:
  • Incremental Borrowing Rate (IBR)
  • Lease term assumptions

• A lower IBR inflates liabilities

• A higher IBR understates them

FP&A Perspective (Forward-Looking)

• Impact on:
  • Debt-to-Equity
  • ROIC
  • Covenant compliance
• A lease that once looked “cheap” may now:
  • Break covenants
  • Reduce project ROI
  • Consume balance-sheet capacity

Same numbers. Very different consequences.

The Professional Playbook

For Auditors: Getting SAAE (Sufficient Appropriate Audit Evidence)

Key audit procedures include:

• Completeness Testing

  Scan the P&L for rent, AMC, or facility expenses that may hide uncapitalized leases.

• Discount Rate Validation

  Validate the IBR using:

  • Bank sanction letters
  • Comparable borrowing rates
  • Yield curves for similar credit profiles

• Lease Term Judgment

  Economic reality matters.

  If a company invests heavily in fit-outs for a 3-year lease, extension is likely not optional.

For FP&A Leaders: Your Model Must Evolve

• Double-Layer Forecasting

  Each lease now needs:

  • Depreciation forecast
  • Interest amortization schedule

• CapEx vs OpEx Reclassification

  Leasing now consumes debt capacity, not just cash flow.

• KPI Recalibration

  Educate leadership:

  • EBITDA growth ≠ operational improvement
  • Track EBITDAR for true performance comparison

Global Quick-Take: Ind AS vs US GAAP

Same economics, different optics.

Strategic Takeaway

I see Ind AS 116 as a standard that transformed rent from a procurement decision into a capital allocation decision.

Every CFO now needs to ask:

Does it still make sense to lease, or should the company buy?

If your team is working through the Ind AS 116 transition or rethinking how leases fit into your capital planning, I would love to compare notes. Let’s connect.