IFRS 16 in Indian Airlines, Retail Chains and IT Parks
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Sai Manikanta Pedamallu
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IFRS 16 in Indian Airlines, Retail Chains and IT Parks
By Sai Manikanta Pedamallu (ACCA, CMA US, CSCA US, CGMA, ACMA, Dip IFRS, M.Com, MBA, MA)
Lead Instructor, Global Fin X | www.globalfinx.in/manikanta
The previous posts in this series covered IFRS 16 mechanics in full. This post looks at what those mechanics actually produced when they hit three of India's most lease-intensive sectors: aviation, retail, and IT services. Each sector had a distinctive lease portfolio going into Ind AS 116 adoption, and each came out of it with a balance sheet that looked materially different from what it showed under Ind AS 17.
I find these sector-level comparisons useful not just for understanding the standard but for developing judgment about what the numbers mean when you read them.
Aviation: The Most Dramatic Balance Sheet Change
No sector in India was transformed more visibly by Ind AS 116 than aviation. Indian airlines own almost nothing that flies. IndiGo, Air India, SpiceJet, and Akasa Air all operate fleets that are overwhelmingly leased from aircraft lessors based in Ireland, the US, and Bermuda. Under Ind AS 17, these were operating leases: nothing on the balance sheet, lease rentals expensed each period.
Under Ind AS 116, every aircraft lease creates a right-of-use asset and a lease liability. The aircraft now appears on the lessee's balance sheet as an asset. The present value of all remaining lease payments appears as a liability.
IndiGo: Numbers from the Annual Report
IndiGo's capitalised operating lease liability stood at Rs. 434,886 million as at 31 March 2024. Total debt including that lease liability was Rs. 512,800 million. The lease liability alone represented roughly 85% of total debt. The fleet at that date comprised 367 aircraft including A320 CEOs, A320 NEOs, A321 NEOs, ATRs, and freighters.
As of FY26, IndiGo operates 440+ aircraft and holds approximately 64% domestic market share.
Before Ind AS 116, IndiGo reported minimal financial debt. Its balance sheet looked like an asset-light technology company. After adoption, the balance sheet shows what it always was economically: a capital-intensive airline with obligations running into hundreds of billions of rupees.
The specific characteristics of aviation leases under Ind AS 116:
Lease term determination is complex. Aircraft leases typically run 6 to 12 years. Many contain options to extend. Whether those options are reasonably certain to exercise depends on fleet strategy, engine availability, and order book timing. For IndiGo, which has placed orders for 500 A320neo family aircraft with deliveries extending into the 2030s, the extension option analysis on older aircraft considers the availability of replacement aircraft.
USD-denominated leases create FX complexity. Aircraft leases globally are denominated in USD. IndiGo's functional currency is INR. The lease liability is recorded in INR at the spot rate on commencement date. Subsequently, it is a monetary liability: foreign exchange movements on the USD lease liability go through profit or loss each period. When the rupee weakens against the dollar, IndiGo's lease liability in INR terms increases, producing a foreign exchange loss. This is a significant source of earnings volatility for Indian aviation.
IBR reflects USD borrowing costs, not INR. Since the lease payments are in USD, the incremental borrowing rate used to discount them is a USD rate (the rate IndiGo would pay to borrow USD), not an INR rate. USD IBRs have been meaningfully higher since the 2022 rate cycle. Leases commenced during the 2022-2024 period carry higher discount rates than those commenced in 2019-2021.
Maintenance provisions interact with Ind AS 116. Aircraft leases typically require the lessee to return the aircraft in a specified maintenance condition. The cost of heavy maintenance at end of lease (or a cash payment to the lessor in lieu of maintenance) is an IAS 37 provision that forms part of the ROU asset at commencement. Tracking and remeasuring these provisions across a fleet of 400+ aircraft is operationally demanding.
The EBITDAR vs EBITDA Question
Aviation analysts use EBITDAR (EBITDA before aircraft rentals) as the key performance metric precisely because it strips out lease costs and makes pre-Ind AS 116 and post-Ind AS 116 comparisons possible. IndiGo reported an EBITDA of Rs. 175,447 million for FY24 against an EBITDAR margin of 25.5%.
The gap between EBITDA and EBITDAR measures the lease cost absorbed into the depreciation and interest charges that are excluded from EBITDA. For IndiGo, depreciation on aircraft ROU assets and finance costs on aircraft lease liabilities are substantial. An analyst using EBITDA to compare IndiGo's profitability against a pre-Ind AS 116 period is comparing incomparable figures without adjustment.
Retail: Own vs Lease Strategy and Its Accounting Consequences
Indian retail presents a fascinating split within the sector itself. DMart operates a deliberate own-rather-than-lease strategy. Most major Indian and international retailers operate the opposite model.
DMart: The Outlier
DMart operates much larger stores ranging up to 30,000 square feet, most of which it owns outright. This was a deliberate founder-led decision by Radhakishan Damani, who believed that owning stores eliminates rental inflation risk, provides security of tenure, and lowers long-term occupancy costs.
The accounting consequence under Ind AS 116 is that DMart's balance sheet change was modest relative to peers. Owned stores are PPE under IAS 16, not ROU assets under Ind AS 116. The lease liability on DMart's balance sheet represents only a small portion of its store portfolio. As of March 2026, DMart operates 479 stores. The overwhelming majority of those stores are on land and buildings owned by the company.
For analysts, this means DMart's balance sheet is genuinely comparable across the Ind AS 17 and Ind AS 116 periods. The transition did not create a structural discontinuity in its metrics. Return on assets, net debt, and leverage ratios for DMart look almost identical before and after adoption.
Shoppers Stop and Fashion Retailers: The Opposite Experience
Apparel and fashion retailers in India operate almost entirely on leased premises. High-street locations, mall spaces, and airport stores are all leased, typically on 5 to 10 year terms with renewal options. Shoppers Stop, Lifestyle, and Westside entered Ind AS 116 with large operating lease portfolios that went on balance sheet in full.
For these retailers, the transition produced:
A material increase in total assets (ROU assets for store premises).
A material increase in total liabilities (lease liabilities for the same premises).
EBITDA improvement as store rental costs moved from operating expenses to depreciation and finance cost.
Net profit decline in early lease years due to front-loading of total charges.
The net debt figure including lease liabilities became the primary credit metric for these entities. A fashion retailer with Rs. 500 crore of lease liabilities and Rs. 50 crore of financial debt is a meaningfully leveraged business, which was not visible in its Ind AS 17 balance sheet.
Reliance Retail: Scale and Complexity
Reliance Retail operates one of the largest retail footprints in India, spanning grocery (Smart Bazaar), electronics (Reliance Digital), fashion (Trends), and specialty formats. It leases mall spaces, high-street locations, and warehousing across thousands of locations.
The Ind AS 116 adoption for Reliance Retail produced ROU assets and lease liabilities running into thousands of crores. The lease portfolio spans multiple asset classes: retail space (typically 5-9 year leases with renewal options), warehouses (shorter or longer depending on location), and logistics facilities.
The critical accounting question for a retailer of Reliance's scale is lease term determination for each store. A flagship electronics store in a high-value mall location, where Reliance has made significant shopfit investment and where the location is strategically important, has extension options that are probably reasonably certain to exercise. A standard grocery store in a mid-tier location with a standard fitout may not. Getting this assessment right across thousands of stores requires a systematic policy, documented lease-by-lease or at least by asset class and store type.
IT Services: The Office Lease Machine
India's IT services sector is one of the most significant leaseholders of commercial real estate in the country. Infosys, TCS, Wipro, HCL Technologies, Tech Mahindra, and Mphasis collectively occupy tens of millions of square feet of office and development centre space.
Wipro: Real Numbers
From Wipro's FY2025 IFRS financial statements filed with the SEC: Right-of-Use assets stood at Rs. 25,598 million as at 31 March 2025, up from Rs. 17,955 million at 31 March 2024. The ROU asset breakdown shows buildings as the dominant category, which makes sense for a company whose primary leased assets are development centres and office campuses.
Wipro's lease liability on the current liabilities side was Rs. 8,025 million. Total lease obligations, current and non-current, would substantially exceed this figure.
The year-on-year increase in ROU assets from Rs. 17,955 million to Rs. 25,598 million reflects new office leases entered into during FY2025 as Wipro expanded or relocated delivery capacity. Each new lease adds a ROU asset and a corresponding lease liability. The depreciation on the ROU asset and the interest on the lease liability flow through the income statement each year.
Infosys: The Incremental Borrowing Rate Policy
Infosys's Ind AS 116 accounting policy specifies that where the interest rate implicit in the lease is not determinable, the company uses the incremental borrowing rate applicable to the lease term and the currency of the lease.
For Infosys, which has leases in India (INR-denominated), the US (USD), Europe (EUR and GBP), and Australia (AUD), this means multiple IBRs are applied across the portfolio. IBRs are higher for emerging market currencies than for developed market currencies. An INR lease at a 9-10% IBR and a USD lease at a 5-6% IBR produce very different present values for the same annual payment amount, because the higher INR discount rate reduces the present value of future payments more aggressively.
This has a counterintuitive implication: an INR-denominated office lease in Bengaluru and a USD-denominated office lease in New Jersey with identical annual payments in local currency terms will have different lease liability sizes when converted to INR, partly because of exchange rate and partly because of IBR differences.
The Lease Register Challenge
For a company like TCS with development centres across hundreds of locations globally, maintaining a complete and accurate lease register is a significant operational task. Each lease requires:
Initial identification and assessment under the Ind AS 116 definition.
Measurement at commencement with the applicable IBR and lease term determination.
Ongoing tracking of payment schedules, modification events, index-linked rent revisions, and option exercise assessments.
Remeasurement when any of these change.
Disclosure preparation for the annual report including ROU asset movement tables by class, lease liability maturity analysis, and variable payment disclosures.
TCS and Infosys both use specialised lease accounting software systems to manage this. The days of tracking office leases in a spreadsheet ended with Ind AS 116.
IT Park Developer Perspective: Embassy REIT and Mindspace REIT
For the other side of these transactions, India's commercial real estate REITs, Embassy Office Parks REIT and Mindspace Business Parks REIT, the Ind AS 116 adoption affected them as lessors, not lessees.
As lessors of commercial office space to IT companies, REITs classify their leases under the lessor model. Long-term office leases to IT companies (typically 5-9 year terms with renewal options) may or may not qualify as finance leases under the risks-and-rewards test. In practice, most IT park leases are operating leases for the REIT-lessor: the REIT retains the residual value of the building, the lease term is substantially less than the economic life of the building, and the present value of lease payments does not approximate the building's fair value.
The REIT continues to carry the buildings as investment property under IAS 40, valued at fair value each period. Rental income is recognised straight-line. Ind AS 116 did not change the REIT's financial statements materially on the lessor side.
What changed for REITs is on the lessee side: REITs hold some assets on ground leases from landowners. These ground leases, which can run 30-99 years, produce very large ROU assets and lease liabilities when capitalised at adoption.
The Metrics That Changed: A Sector Summary
| Metric | Aviation (IndiGo) | Retail (Shoppers Stop) | IT Services (Wipro) |
|---|---|---|---|
| Balance sheet impact | Very large: fleet lease liabilities dominate debt | Moderate to large: store lease liabilities | Moderate: office campus leases |
| EBITDA change | Large increase: aircraft rentals removed from above-EBITDA | Moderate increase: store rentals removed | Moderate increase: office rentals removed |
| Net profit (early years) | Decreased: front-loading of depreciation + finance cost | Decreased | Marginally decreased |
| Operating cash flow | Increased: principal payments move to financing | Increased | Increased |
| Leverage ratios | Dramatically changed: lease liabilities dominate debt | Material change | Moderate change |
| Comparability pre/post | Requires EBITDAR adjustment | Requires operating lease add-back | Requires operating lease add-back |
| FX complexity | High: USD leases, INR functional currency | Low: INR leases | Moderate: mixed currency portfolio |
What Analysts Adjusted For
Post-Ind AS 116, sophisticated analysts covering these sectors developed adjusted metrics to make comparisons meaningful:
Adjusted EBITDA: Reverting EBITDA to a basis that includes lease costs (adding back depreciation of ROU assets and subtracting lease payments) to create a metric comparable to pre-Ind AS 116 EBITDA. This is how EBITDAR functions for aviation.
Adjusted net debt: Some analysts exclude lease liabilities from net debt when the leases are genuinely operational and non-financial in character. Others include them in full. Neither is universally correct: the right treatment depends on whether the analyst is measuring credit risk (where lease liabilities are real obligations) or operational efficiency (where they may be less relevant).
Free cash flow after leases: Cash from operations less capex less lease liability principal repayments. This gives a truer picture of distributable free cash than the pre-Ind AS 116 operating cash flow, because principal lease repayments now appear in financing activities and would otherwise be invisible in the operating cash flow figure.
Ind AS 116 Disclosure Quality: What the Annual Reports Show
The quality of lease disclosures varies significantly across Indian listed companies. Companies that have invested in proper lease accounting systems tend to produce clear, sector-specific disclosures. Those that have not tend to produce generic notes that satisfy the minimum requirement without being genuinely informative.
Good disclosures in Indian IT and aviation annual reports include: ROU asset movement tables by asset class (buildings, plant and equipment, vehicles), interest on lease liabilities by asset class, a maturity analysis of undiscounted lease payments by time band, a description of the lease portfolio and key terms, and disclosure of variable lease payments not included in the liability.
Weaker disclosures aggregate everything into a single line, provide a maturity table without disaggregating asset classes, and omit explanation of significant lease terms or the IBR applied.
What Big 4 Auditors Focus On in These Sectors
Aviation: FX remeasurement completeness. USD-denominated lease liabilities must be remeasured at each reporting date using the closing spot rate. Auditors test whether all USD leases have been remeasured, whether the FX gain or loss has been correctly calculated, and whether the remeasurement is reflected in both the lease liability and the ROU asset (for IBR-driven remeasurements) versus only in the liability (for FX remeasurements, which do not adjust the ROU asset).
Aviation: Maintenance provision interaction. Auditors review IAS 37 maintenance provisions embedded in ROU assets at commencement and test whether they have been remeasured as maintenance cost estimates change.
Retail: Lease term for stores with significant shopfit investment. For high-investment retail locations, auditors challenge whether extension options have been included in the lease term. A retailer that has spent Rs. 5 crore on fitout in a 5-year lease with a 5-year extension option and claims the extension is not reasonably certain to exercise has a difficult argument to make.
IT Services: IBR documentation and currency allocation. For global IT companies with leases in multiple currencies, auditors verify that IBRs are appropriate for each currency and market, that they are refreshed for new leases and modifications, and that the currency allocation of ROU assets and lease liabilities is consistent with the underlying lease currency.
All sectors: Completeness of lease register. The most fundamental audit risk is an incomplete lease register. Contracts that contain leases but are not captured in the lease accounting system produce unrecognised ROU assets and lease liabilities. Auditors test completeness through contract-level sampling from procurement records, payables data, and legal contract registers.
Dip IFRS Exam Angle
The Indian sector context rarely appears directly in Dip IFRS exam questions, which use generic scenarios. But knowing how the standard plays out in practice across these three sectors builds the conceptual intuition needed for exam questions.
The most useful exam angles from these sector examples:
Aviation: Understand that USD-denominated lease liabilities in an INR-functional currency entity create ongoing FX remeasurement. The ROU asset does not remeasure for FX changes (it is a non-monetary asset measured at historical rate). Only the lease liability remeasures. This creates a natural mismatch between the ROU asset and the lease liability that produces ongoing FX gains or losses in P&L.
Retail: The lease term for a store with significant leasehold improvements and a strategically important location should typically include extension options. Exam questions that describe a retail entity with major shopfit investment and a renewal option are testing whether the candidate includes the renewal period in the lease term.
IT Services: Multiple currencies in a lease portfolio require multiple IBRs. The IBR for an INR lease is not the same as the IBR for a USD lease. Exam scenarios that involve cross-border leases may test IBR selection.
FAQ
Why does IndiGo report EBITDAR alongside EBITDA?
EBITDAR (Earnings Before Interest, Taxes, Depreciation, Amortisation, and Rentals) adds back aircraft lease costs to EBITDA, making the metric comparable across periods regardless of whether operating leases are on or off the balance sheet. It is the standard profitability metric for airline analysis because it strips out the lease cost structure entirely, allowing comparison of operational efficiency independent of fleet financing choices.
Does DMart's own-versus-lease strategy make its returns look better or worse under Ind AS 116?
In isolation, owning stores means no Ind AS 116 lease liability, so DMart's leverage ratios look better than peers on a reported basis. However, owned stores require capex rather than lease payments. Analysts adjust by capitalising lease costs for peers or by comparing return on invested capital, which captures the capital consumed by both ownership and leasing models.
How do Indian IT companies handle lease modifications when office footprint changes post-COVID?
Lease modifications that reduce the leased space (partial terminations) require derecognition of the portion of the ROU asset relating to the surrendered space and a corresponding reduction in the lease liability. Any gain or loss on the difference goes to P&L. Several Indian IT companies restructured their office portfolios significantly in 2021-2023, and each such restructuring triggered modification accounting.
What happens to the FX loss on IndiGo's USD lease liability when the rupee weakens?
The lease liability increases in INR terms. The increase is recognised as a foreign exchange loss in profit or loss for the period. The ROU asset is not affected (it is a non-monetary INR asset). This creates a mismatch: the liability grows but the asset does not, producing equity erosion. IndiGo and other Indian airlines report this FX impact separately in their financial statements as it is a material and recurring item.
Do Indian IT parks (REITs) have significant lease liabilities?
Yes, on the lessee side. REITs hold properties on long-term ground leases from landowners, which produce ROU assets and lease liabilities under Ind AS 116. The size of these liabilities depends on the remaining ground lease term and the ground rent payable. For a REIT with a 99-year ground lease and significant annual ground rent, the lease liability at commencement can be very large.
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This is Post 32 of the Global Fin X IFRS Series. Previous: IFRS 16 vs IAS 17: What Changed, What Stayed and Why the Balance Sheet Exploded. Next: Post 33: IAS 16 Property, Plant and Equipment: Recognition, Measurement and Depreciation.