Classification and Presentation of Lease Receivable by Ind AS Compliant NBFC

1. Query

G Ltd (herein referred to as “the company”) is registered as a Systemically Important Non-Deposit taking Non-Banking Financial Company. The company is engaged in the business of borrowing funds from the financial markets for the acquisition/creation of assets which are then leased out to the Indian Railways under finance lease arrangements.

The company, as a lessor, has classified the leased-out assets to Indian Railways as “finance leases” in accordance with Ind AS 116, ‘Leases’. Being a Systemically Important Non-Deposit taking Non-Banking Financial Company, the company is required to follow Division III to Schedule III of the Companies Act, 2013 in preparation of financial statements. The company is continuously presenting ‘Lease Receivables’ from the Indian Railways as part of ‘Receivables’ on the face of its Balance Sheet as per the requirements stated under para 67 of Ind AS 116.

The statutory auditor is of the view that the company was wrongly classifying the ‘Lease Receivables’ under ‘Receivables’. In accordance with Division III of Schedule III to the Companies Act, 2013, the said lease receivables should be presented as ‘Loans’ rather than ‘Receivables’.

The management of the company does not agree with the auditor’s observation as the company is primarily a leasing company and not a loan company (which is a very small portfolio). If the lease receivables are presented as part of ‘Loans’, in that case, it would prima facie, appear to a general investor that the Company is a loan company. The material information is obscured. Presenting ‘Lease Receivables’ as ‘Receivables’ on the face of the Balance Sheet immediately and at first glance itself establishes the Company as a leasing company.

The management d approached the Expert Advisory Committee for its opinion on whether Lease Receivables should be classified and presented in the balance sheet as Receivables or as Loans.

2. Relevant Provisions

2.1 Ind AS 116: Leases

a. Para 67:

At the commencement date, a lessor shall recognise assets held under a finance lease in its balance sheet and present them as receivable at an amount equal to the net investment in the lease.

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