IFRS 16 Leases
International Financial Reporting Standard 16
Overview of IFRS 16
- Issued: in 2016
- Effective date: 1 January 2019
- What it does:
- It sets the principles for accounting for leases , by both lessors and lessees;
- It provides guidance related to identification of a lease in a contract and separating individual components of a contract;
- Lessees account for all the leases in the same way. At the inception of the lease, they recognize:
- The right-of-use asset; and
- The lease liability.
IFRS 16 then specifies how to measure both elements initially and subsequently, how to account for remeasurements, variable lease payments, etc.
- There are two exceptions for lessees:
- Short-term leases (lease term max. 12 months); and
- Underlying asset is has a low value when new
Lessees may account for lease payments as an expense in profit or loss .
- Lessors need to classify the lease as either operating or finance. The accounting treatment depends on the type of the lease:
- Finance lease: Lessor initially recognizes the receivable equal to net investment in the lease. Subsequently finance income is recognized in profit or loss.
- Operating lease: Lessor recognizes the lease payments received as income in profit or loss.
- IFRS 16 deals specifically with sale and leaseback transactions and disclosures.
Articles about IFRS 16
- Summary of IFRS 16 Leases
- IFRS 16 Leases vs. IAS 17 Leases: How the Lease Accounting Changed
- Troubles with IFRS 16 Leases
- How to Implement IFRS 16 Leases - this article describes (besides other aspects) the difference between modified and full retrospective approach to transition
- Example: How to Adopt IFRS 16 Leases - here, you can see the difference between modified and full retrospective approach illustrated on numerical example
Questions and Answers
- What is the lease term of cancellable property rentals under IFRS 16? - imagine you rent an office for an indefinite period... should you account for right-of-use asset?
- How to account for rentals depending on inflation and future sales? - imagine you rent an office and your rentals are increased every two years by inflation. How to account for this?
- How to determine the incremental borrowing rate? - if you cannot use the interest rate implicit in the lease (most lessees cannot!), how should you determine the discount rate for the lease?
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