IFRS 16 Leases Overview

IFRS 16 Leases

• IFRS 16 outlines accounting requirements for leases, focusing on lessee accounting.
• The standard applies for annual reporting periods beginning on or after 1/1/2019.
• Prior to IFRS 16, IAS 17 was the standard for lease accounting, but is no longer applicable.

Lease Definition

• A lease is a contract or part of one that conveys the right to control the use of an identified asset for a specific time period in exchange for consideration.
• Control of an asset requires the right to obtain substantially all of the economic benefits from using it and to direct the use of the asset.

IFRS 16 Leases (Lessee Perspective)

• IFRS 16 provides principles for recognizing, measuring, presenting, and disclosing lease information that accurately reflects the transaction.
• This information enables users of financial statements to evaluate how leases affect an entity's financial position, performance, and cash flows.

Separating Lease and Non-Lease Components

• Lease and non-lease components in a contract are accounted for separately.
• The consideration in a contract with both lease and non-lease components is allocated to each component based on relative stand-alone prices.
• If a readily observable stand-alone price isn't available, the lessee estimates the price.

No Separation of Lease and Non-Lease Components

• Lessees may choose not to separate lease and non-lease components for specific asset classes.
• This is a practical expedient rather than a general rule.

Application of IFRS 16

• IFRS 16 applies to nearly all leases.
• However, exceptions include short-term leases and leases of assets with low values (typically under USD 5,000).
• For non-compliant leases, lease payments are recognized as an expense on a straight-line or other systematic basis reflective of the benefit received.

Lease Term

• The lease term encompasses the non-cancellable period plus any extensions/terminations reasonably expected to occur.

Interest Rate Implicit in the Lease

• The interest rate implicit in the lease could be provided in a question and is considered when calculating the lease liability.

Accounting for Leases (Lessee Perspective)

• At commencement, a lessee recognizes a right-of-use asset and a lease liability.
• The lease liability is the present value of lease payments not paid upfront, discounted at the rate implicit in the lease or the lessee's incremental borrowing rate if the implicit rate isn't readily determinable.
• The right-of-use asset cost includes the lease liability amount, lease payments made prior to commencement, initial direct costs, and incremental costs like a finder's fee.

Subsequent Measurement of the Right-of-Use Asset

• After commencing, the right-of-use asset is measured via a cost model or the revaluation model (IAS 16 assets).

Depreciation of the Asset

• Depreciating the right-of-use asset follows IAS 16 rules.
• If a lease transfers ownership at the end of the lease or the purchase option is exercised, the right-of-use asset is depreciated over the underlying asset's useful life.

Measurement of Lease Liability

• Lease liability is measured at amortized cost.
• Increases reflect interest on the liability.
• Decreases reflect lease payments.
• IFRS 8.17, 8.18, 8.19 cover payments in advance.

Interest on Lease Liability

• Interest on the lease liability is determined periodically at a constant interest rate determined at commencement.
• Recognized in profit or loss after commencement.

Accounting for Leased Asset with Non-Lease Components

• Separate accounting for lease and non-lease components exists.

Presentation

• Right-of-use assets and lease liabilities need separate presentation in the statement of financial position or through a detailed disclosure note.
• Société des comptes (also known as the Statement of Comprehensive Income or profit and loss account, depending on the country where the financial statement is being used) details the components, like interest expense on the lease liability, as a separate entry, as well as the depreciation expense related to the right-of-use asset.

Disclosures

• Comprehensive disclosure of lease information is required.
• This includes information on depreciation of right-of-use assets, interest expense on lease liabilities, and other relevant details.

Explore the key aspects of IFRS 16, the accounting standard for leases. This quiz covers definitions, lessee perspective principles, and the impact of leases on financial statements. Gain a clear understanding of how IFRS 16 changes the leasing landscape in accounting.