IFRS 16 sets out how an entity will recognize, measure, present, and disclose leases. The standard provides a single lessee accounting model in which the lessees shall recognize the right of use assets and lease liabilities for all leases unless its term is 12 months or less or the asset is of a low value. Meanwhile, lessors continue to classify leases as operating or finance leases, with the lessor accounting substantially unchanged from the superseded IAS 17.

Effectivity Date of IFRS 16

IFRS 16 Superseded Standards

IFRS 16 replaced the following standards and interpretations:

• IAS 17 – Leases
• IFRIC 4 – Determining whether an Arrangement contains a Lease
• SIC-15 – Operating Leases – Incentives
• SIC-27 – Evaluating the Substance of Transactions Involving the Legal Form of a Lease

Issued IFRS 16 Standard

The official publication for IFRS 16 – Leases can be downloaded here – IFRS 16 Publication.

New Lease Standard Objectives

IFRS 16 establishes principles for the new lease accounting to ensure that lessors and lessees report information that:

(a) faithfully represents lease transactions and
(b) provides a basis for users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases [IFRS 16:1].

Why Change to IFRS 16

The objective of transitioning to IFRS 16, the new lease standard, is to make sure that entities prepare information in a more transparent way. This is because many businesses hold large financial liabilities on their operating leases but since it is an operating lease, it is kept off the balance sheets giving a distorted view of an entity’s overall financial status.

According to the board, more than 85% of lease obligations, worth US$3.3 trillion, do not appear on listed company balance sheets (for companies using IFRS standards or US GAAP).

This makes it difficult for investors to compare companies since they still need to estimate the effects of an entity’s off-balance sheet lease commitments.

The IASB Chairman Hans Hoogervorst said that:

These new accounting requirements bring lease accounting into the 21st century, ending the guesswork involved when calculating a company’s often-substantial lease obligations.

The new Standard will provide much-needed transparency on companies’ lease assets and liabilities, meaning that off-balance sheet lease financing is no longer lurking in the shadows. It will also improve comparability between companies that lease and those that borrow to buy.

IFRS 16 Scope

The new lease standard applies to all leases, including subleases, except for (IFRS 16:3):

• leases to explore for or use minerals, oil, natural gas and similar non-regenerative resources;
• leases of biological assets held by a lessee (see IAS 41 Agriculture);
• service concession arrangements (see IFRIC 12 Service Concession Arrangements);
• licences of intellectual property granted by a lessor (see IFRS 15 Revenue from Contracts with Customers); and
• rights held by a lessee under licensing agreements for items such as films, videos, plays, manuscripts, patents and copyrights within the scope of IAS 38 Intangible Assets

A lessee may apply IFRS 16 to leases of intangible assets, other than those items listed above (IFRS 16:4).

IFRS 16 Recognition Exemptions

An entity may elect not to apply IFRS 16 and account for the lease payments as an expense for the following:

• Leases with a term of 12 months or less with no purchase option – this election is made by a class of underlying assets.
• Leases where the asset has a low value when new – this election can be made on a lease-by-lease basis.

Next lesson – Identifying a Lease