Lease accounting (Ind AS 116): why rent shows up as depreciation

Ind AS 116 is the standard on leases within the Indian Accounting Standards, issued under the Companies (Indian Accounting Standards) Rules 2015. It has applied since 1 April 2019, as of November 2026, to companies required to follow Ind AS. It replaced the older Ind AS 17.

The main idea is that a lease gives the tenant the right to use an asset, so the tenant should show that right and the promise to pay for it. Companies that follow the older Indian GAAP use AS 19 instead and may still show rent as a simple expense.

A recent live case: Awfis, a co-working company, reported in its September 2026 quarter results that lease depreciation was its biggest cost, at ₹119 crore for the first half of FY27.

The standard exists because investors wanted lease obligations visible. Under the old rules, a company could rent most of its stores and show little debt, which hid how much it had committed to pay.

At the start of a lease, the company records two entries. A right-of-use asset represents the right to use the space. A lease liability represents the present value of the rent still to be paid over the lease term, discounted at an interest rate.

Over time the asset is depreciated, usually in equal parts across the lease term. The liability earns interest charges, higher in the early years and lower later, while rent payments reduce it. This is why the same lease costs more in the first years than in later ones.

The discount rate is usually the rate at which the company would borrow to buy a similar asset, called the incremental borrowing rate. A higher rate means a smaller starting liability but larger interest charges later.

If the lease changes, for example when rent is revised or the term is extended, the company remeasures the liability and adjusts the asset. This is why lease numbers can move between quarters even when no new store opens.

Rent used to be an operating expense. Now the same cash payment is split between paying off the liability and paying interest on it. The profit and loss account shows depreciation of the asset and finance cost on the liability, not a rent line.

Cash flow does not change. The rent is the same money going out. Only the labels and timing of the expenses change, and the cash flow statement shows the principal part under financing activities.

• Right-of-use asset: depreciated over the lease term.
• Lease liability: carries interest, reduced by each payment.
• P&L: depreciation plus interest replaces rent.
• Cash flow: the same cash paid, shown partly as financing.

EBITDA stands for earnings before interest, tax, depreciation and amortisation. Because rent is now depreciation and interest, both of which sit below EBITDA, EBITDA rises compared with the old treatment. The company looks more profitable at the operating level, even though the cash cost is unchanged.

Profit before tax over the whole lease is the same, but the timing differs. The combined depreciation and interest is higher in the early years of a lease than a flat rent would be, so reported profit is lower early and higher later.

For companies with many stores, cafes, offices or warehouses, the effect is large. Comparing EBITDA across firms can mislead unless the lease treatment is the same, so analysts often look at EBITDA after rent, which subtracts lease payments again.

Most Indian listed startups and large unlisted companies follow Ind AS, so the effect shows up in quarterly results. A reader should compare a company's EBITDA with its own earlier periods rather than with a firm that reports under a different standard.

A company that rents many locations records a right-of-use asset for each. Every new store adds to the base that is depreciated, and every renewal creates a new asset. When the business grows quickly, lease depreciation grows with it.

For a co-working operator, the leased buildings are the main assets, so lease depreciation can be the largest cost, even above salaries. The same applies to restaurant, retail and warehouse chains.

Another effect is on margins. Because EBITDA rises, EBITDA margin looks better for rent-heavy businesses. A reader comparing a co-working firm with a software company should remember that the former carries a large lease cost lower down the statement.

A tenant may choose not to apply the model to two kinds of lease: short-term leases of 12 months or less, and leases where the underlying asset is of low value when new, such as laptops or small furniture. The rent for those is expensed in the usual way and appears above EBITDA.

Even then, the company must disclose the amount of expense in the notes to the accounts. Lease terms also include extension options that the company is reasonably certain to use, so the term is a judgement and it can change the numbers.

Variable rent that depends on sales, such as a percentage of revenue paid to a mall, is generally not included in the liability. It is expensed as it arises, so such payments stay above EBITDA and reduce it. A company with mostly revenue-linked rent therefore shows a smaller lease effect.

Lease liabilities are real obligations, so they sit on the balance sheet next to loans. A company with many leases can show a much larger total liability than before 2019, even if it borrowed nothing new.

Ratios change too. Debt to EBITDA may look the same or better, because both debt and EBITDA rise. Lenders and analysts therefore often choose whether to include lease liabilities in net debt, and the choice should be stated.

Look at three numbers: lease depreciation, finance cost on lease liabilities, and the cash paid for leases in the cash flow statement. Compare EBITDA before and after lease costs. Check whether net debt includes lease liabilities.

Some companies publish an adjusted figure that deducts rent from EBITDA. Treat it as a clearer view of the operating cost of the footprint. This is general information, not accounting or investment advice; check the company's notes and a qualified accountant for specifics.