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July 13 To July 19, 2019 u Taxmann’s Corporate Professionals Today u Vol. 45 u 49Introduction
- Ind AS 116 Leases that is effective from 1 April, 2019 is
impacting the accounting and financial reporting for Ind AS
compliant companies across the sectors. The new leasing
standard represents a fundamental shift in accounting for
leases, specifically for lessees. With certain exceptions, lessees
are generally required to recognize lease liabilities and right-
of-use assets in their financial statements. The new standard
does away with the differential treatment for operating and
finance leases for lessees.
This article highlights the key considerations regarding the
evaluation of job work or contract manufacturing arrange-
ments for potential embedded leases. The new leases standard
requires lessees to record an asset and a liability on the bal-
ance sheet for nearly all leases. This requirement also applies
to any leases embedded in other arrangements. To identify
embedded leases, companies need to consider arrangements
not typically regarded as leases, including supply contracts,
data centre agreements, outsourcing contracts and contract
manufacturing arrangements. This article focusses on the
latter as an example of an arrangement that might contain
an embedded lease. Determining whether an arrangement
contains an embedded lease often requires a detailed analysis
that involves significant judgment.
Typical features of contract manufacturing
arrangements- Contract manufacturing agreements can take different
forms. Generally, these agreements are structured such that
Ind AS 116: Identifying
Leases in Job Work/Contract
Manufacturing Arrangements
SANTOSH MALLER
CA