Operating lease

A rental arrangement that gives the company the use of an asset without owning it. Stores, aircraft, hotels and warehouses are usually held this way.

Under the current standards a lessee recognises a right-of-use asset and a matching lease liability for almost all leases, so the obligation is now visible. The income statement effect changed too: rent disappeared as a single operating cost and was replaced by depreciation on the asset plus interest on the liability, which raises reported earnings before interest and tax without any change in the business. That's the Ind AS 116 and IFRS 16 treatment. Under US GAAP an operating lease also goes on the balance sheet, but the income statement keeps a single straight-line lease cost inside operating expenses, and only a finance lease splits into amortisation and interest.

Where a pre-transition figure is all you have, a rough capitalisation multiplies the annual rent by somewhere between five and eight times. Rent of ₹240 crore at 5.5 times gives ₹1,320 crore of implied debt.

Any returns calculation for a retailer or an airline that ignores leases is fiction. It's the most common error in sector analysis.