If you think a lease is just a monthly ”rent expense,” your financial ratios are probably outdated.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

Every lease is now treated 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 used to be invisible leverage is now explicit financial risk.

The EBITDA Illusion

This change isn’t 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

Standard Lease Treatment Expense Pattern
Ind AS / IFRS 16 Single finance-lease model Front-loaded
US GAAP (ASC 842) Operating leases still allowed Straight-lined

📌 Same economics, different optics.

Strategic Takeaway

Ind AS 116 transformed rent from a procurement decision into a capital allocation decision.

Every CFO must now ask:

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