Motilal Oswal: Ind AS 116- Lease Accounting Turns Cash Flows Incomparable  

Motilal Oswal Report

The implementation of Indian Accounting Standard (Ind-AS) 116 Lease accounting has brought about a significant impact on the reported financials of companies in FY20.

This has turned the reported financials incomparable with earlier years. Throughout FY20, investors tried comprehending the impact and adjusted their reported earnings (operating and net) to the changes brought by the new accounting standard in order to understand the impact on business (on like-to-like basis).

As companies now disclose year-end cash flow statements, investors are currently finding reported cash flows (within internal heads changed) also incomparable.

We note that this is primarily due to lease rental outflows now being excluded from operating activities in cash flows.

Instead, lease rental outflows are being recognized under the heads of (a) interest payable toward lease liabilities, and (b) principal repayment of lease liability - in the financing cash flows.

Thus, due to the change in accounting system, while overall cash flows of companies have remained unchanged, reported operating cash flows and free cash flow of companies are overstated at the expense of higher outflows in financing activities.

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