Substitution Right of Lessor May Cause the Leased Assets to Fall Outside the Scope of Ind AS 116, Leases

A Ltd. herein referred to as “the company” is engaged in the business of city gas distribution decides to lay down the gas distribution network throughout the city. The company enters into 15 years way leave agreements with Indian Railways for lying underground pipelines on their land. The company had made advance payment of entire consideration before the commencement of the contract, In accordance to the Indian GAAP, the company used to classify this advance payment as “Prepaid Expense” under the heading of “Other Non-Current Assets”. However, after the application of Ind AS, the company’s auditor advised them to reclassify such prepayments under “Right to Use Assets” in accordance with Ind AS 116. The company accordingly reclassified the aforesaid assets under “Right to Use Assets”.

Thereafter, in the subsequent year, the company’s statutory auditor were changed and these auditors claimed that the classification of prepayment as ROU assets is incorrect as the company only have a right to lay the underground pipelines and not the actual land in its physical form. They advised the company to reclassify such prepayments as “Intangible Assets” under Ind AS 38, Intangible Assets.

The company was in dilemma regarding the accounting treatment of prepayment made by them. To get rid of this and determine the correct accounting treatment, the company sought the opinion of Expert Advisory Committee of ICAI.

To know the Expert’s opinion as to, whether the prepayment made towards way leave charges shall be accounted for “Right To Use Assets” under Ind AS 116 or as “Intangible Assets” under Ind AS 38.

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