The new Leases Standard - IFRS 16

The International Accounting Standards Board today issued a new Standard, IFRS 16 Leases.

IFRS 16 supersedes IAS 17 'Leases' and related interpretations and is effective for periods beginning on or after 1 January 2019, with earlier adoption permitted if IFRS 15 'Revenue from Contracts with Customers' has also been applied.

The previous accounting model for leases required lessees and lessors to classify their leases as either finance leases or operating leases and account for those two types of leases differently. That model was criticised for failing to meet the needs of users of financial statements because it did not always provide a faithful representation of leasing transactions.

The new Standard sets out the principles for the recognition, measurement, presentation and disclosure of leases. The objective is to ensure that lessees and lessors provide relevant information in a manner that faithfully represents those transactions. This information gives a basis for users of financial statements to assess the effect that leases have on the financial position, financial performance and cash flows of an entity.

Accounting by lessees

For lessees, the new standard brings most leases (with limited exceptions) on-balance sheet, eliminating the distinction between operating and finance leases. IFRS 16 introduces a single lessee accounting model and requires a lessee to recognise assets and liabilities for all leases with a term of more than 12 months, unless the underlying asset is of low value (as further defined in the Standard with examples including tablet and personal computers, small items of office furniture and telephones.). A lessee is required to recognise a right-of-use asset representing its right to use the underlying leased asset and a lease liability representing its obligation to make lease payments.

For leases with a lease term of 12 months or less and leases for which the underlying asset is of low value, a lessee may elect to recognise the lease payments associated with those leases as an expense on either a straight-line basis over the lease term or another systematic basis if that basis is more representative of the pattern of the lessee’s benefit.

IFRS 16 contains disclosure requirements for lessees. Lessees will need to apply judgement in deciding upon the information to disclose to meet the objective of providing a basis for users of financial statements to assess the effect that leases have on their financial position, financial performance and cash flows.

Accounting by lessors

Lessor accounting remains largely unchanged and the distinction between operating and finance leases is retained. IFRS 16 requires enhanced disclosures to be provided by lessors that will improve information disclosed about a lessor’s risk exposure.