Leasing is an important financing activity for large corporate and financial institutions with the majority not reported on balance sheet. That is because leases to date have been categorised as either ‘finance leases’ (which are reported on balance sheet) or ‘operating leases’ (which are disclosed only in the Income statement and Notes to the financial statements).

IFRS 16 - Leasing

Historically, Lease accounting (IAS17) focused on lease classification:

A) Finance Lease - where a lease is economically similar to purchasing the underlying asset and reporting the asset (& liability) on balance sheet

B) Operating Lease - where a lease gives rise to an:

  • Asset: “A resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity”
  • Liability: “A present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits.”

Neither of which are reported on the balance sheet nor are disclosed only in the notes to the financial statements (as an Operating Lease).

This, somewhat arbitrary distinction, made it difficult for investors to compare companies. There was also criticism from investors that reported balance sheets provide a misleading picture about leverage and leased assets used. This meant that investors (and others) had to estimate the effects of a company’s off balance sheet lease obligations, which in practice often led to overestimating the liabilities arising from those obligations.

To manage the criticism received for IAS 17 accounting treatment of leases, the International Accounting Standards Board (IASB) is introducing a new Leasing standard: IFRS16.


Effective date and transition

An entity shall apply IFRS 16 retrospectively for annual periods beginning on or after January 1, 2019

Leases: A guide to IFRS 16

The purpose of this publication is to:

  • Provide an overview of the definition and scope of IFRS 16 and a comparison against IAS 17
  • Explain IFRS 16 impact on corporates, banks and financial institutions
  • Inform clients how they can best prepare themselves for the new classification requirements under IFRS 16 and what information with regards to classification of lease contracts they will need to prepare for audit purposes
  • Provide an overview of how Deloitte can help clients in Cyprus address the challenges of IFRS 16 implementation
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