What is IFRS 16?
IFRS 16: Leases is an IFRS rule that has changed how lease disclosures are recognized, measured, and presented. IFRS 16 uses a single leasing account model. It requires lessees to recognize assets and liabilities for all leases over 12 months and reasonably sized underlying assets. IFRS 16’s approach to lessor accounting is unchanged from its predecessor IAS 17. Lessors will continue to classify leases as either operating or finance.
Why IFRS 16?
Issued in January 2016 with a go-live date of January 1, 2019, IFRS 16 sets out to ensure that lessees and lessors are disclosing information that accurately represents the lease transaction. The standard seeks to prevent off-balance sheet operating leases by establishing set principles.
Who does IFRS 16 effect?
IFRS 16 applies to all reporting entities who have operating leases and subleases. Exceptions include lease terms under 12 months or low value underlying assets.
According to PWC, “IFRS 16 may also impact business models and offerings as lease needs, and behaviors of lessees change. It may also accelerate existing market developments in leasing such as an increased focus on services rather than physical assets. Changes to the lease accounting standard will impact lessees’ business processes, systems and controls. Lessees will require more detailed data around their leases given the on-balance sheet accounting for almost all leases. Companies will need to take a cross-functional approach to implementation, not just accounting.”
What's the meaning of IFRS 16 for those impacted?
IFRS reporting entities who have operating leases have to create and manage their inventory of leases. They also have to contend with new calculations related to elements and journal entries, including:
- Right of Use Asset
- Lease Liability
- Interest Expense
What is lease accounting?
The definition of lease accounting begins with the definition of a lease. A lease is a piece of property or asset that the owner (also known as the lessor) allows another party to use (also known as the lessee) at a cost. The lease is formalized in a contract that contains the terms of the lease.
Lease accounting is the financial record of these transactions that include: the opening balance, interest, principal payment, closing balances-over-time, journal entries, taxes, and depreciation.
There are two types of leases in lease accounting.
Operating lease: Think of renting an apartment. All the risks stay with the lessor. The asset is returned at the end of the term.
Financing/capital lease: The lessee assumes all risks and returns.