How Will The New Accounting Norms Affect Retail Companies?

Modifications to the Indian Accounting Standards (Ind AS) have been going since the last couple of years in order to be in line with global IFRS standards. Only a year ago Ind AS 115 was introduced that rendered obsolete previous Ind AS 11 and 18. This year saw the introduction of Ind AS 116, introducing a standard for leases in that all leases on a lessee’s balance sheet will be recognized and elimination of differentiation between finance leases and operating leases. Retail businesses that lease properties will have to account for it in the balance sheet. The result is that the balance sheet will show an increase which is not real since the asset is leased, not bought. The changed accounting norms 2019 will affect retail as well as other sectors in different ways.

Impact on profits

Under the new implementation of Ind AS 116 finances of retail companies are likely to be affected in that leases must reflect in the balance sheet. Retailers will report more debt and this could have an adverse impact on stakeholders.

Inclusion of costs

There are costs involved in the acquisition of a lease, both direct and indirect such as commissions, brokerage, lawyer’s fees and others. All these costs will need to be reflected in the accounting statements as part of the right to use of the asset and amortized over the lease term.

Recognition of lease liabilities

Retail will have to take into account the fixed payments and payments like residual value guarantees as well as variable payments at current values and these must be reflected in the balance sheet. What will happen is that content rents that are based on sales may be excluded from lease liability and accounted only when sales actually take place. If a lease is renewed at a higher price then the lessee, in this case, the retailer, must include such payment in the calculation of lease liability. It is a point worth noting that such government amendments are not likely to feature at all in standard B.Com textbooks or courses and an account will need to keep himself updated by learning on his own or joining specialized tax and accounting courses. Equally, the lease may be terminated and this poses a new set of questions. Accounting needs to factor in lease term too.

Services, restoration

Retail market operators will now have to identify services under the lease agreements that do not match the definition of a lease. This may be insurance and maintenance and such costs can be excluded from lease liability. The other option is to include it in the lease cost. In the case of repairs and restoration, such costs are not part of the lease liability and expenses of restoration of repairs are shown as incurred expenses.

Lease incentives

If a lessor offers incentives to a lessee to sign the lease then such incentives reduce the lessee’s liability and affect lease classification test.

There are various complications Ind AS 116 has brought in its wake and accountants wishing to stay on top may pursue accounting courses in Ahmedabad.