IFRS 16 Leases replaces IAS 17, SIC 15, SIC 27 and IFRIC 4 and sets out the principles for the recognition, measurement, presentation and disclosure of leases by lessors and lessees. IFRS 16 applies to accounting periods beginning 1 January 2019 but early application is permitted, provided that IFRS 15 Revenue from Contracts with Customers is also applied.
Impact on lessees
Lessees will bring all leases within the scope of IFRS 16 on balance sheet, showing an asset for the right of use and a liability for the discounted amount of future payments.
For operating leases, the single amount currently included within operating results as lease costs in profit or loss would be split into operating and finance components. This will result is a front loaded expense profile compared to the straight line expense profile associated in the past.
Total cash flows will remain unchanged but there will be a change in analysis as principal repayments will be included in financing and interest payments will be included in operating or financing.
The liability is initially recognised at the present value of the lease payments, including non-cancellable lease payments and certain optional payments if the lessee is reasonably certain to exercise the option.
The lease payments are discounted using the interest rate implicit in the lease and if that rate cannot be readily determined the lessee should use its incremental borrowing rate.
The right-of-use asset is measured at cost, which is the initial amount of the lease liability adjusted for lease payments made at or before the commencement date, lease incentives received, initial direct costs incurred by the lessee and estimated decommissioning costs.
Subsequently, the lessee will measure the right-of-use asset similarly to other non-financial assets and lease liabilities similarly to other financial liabilities.
The lease liability is remeasured if specified events occur.
Impact on lessors
IFRS 16 substantially carries forward the lessor accounting requirements in IAS 17. A lessor continues to classify its leases as operating leases or finance leases, and to account for those two types of leases differently.
Sale and leaseback
The IFRS 15 requirements for determining when a performance obligation is satisfied are used to determine whether the transfer of an asset is accounted for as a sale of that asset. If it does not satisfy these, it is accounted for as a financing transaction by both the seller-lessee and the buyer-lessor.
Disclosures
IFRS 16 requires enhanced disclosures by both lessees and lessors.
Transitional provisions
There are various transitional provisions for both lessees and lessors, many of which are based on the date of initial application. For lessees they include adopting a fully retrospective approach or a modified retrospective approach.
Actions
Entities should consider as soon as possible what the effects will be on their balance sheet and results.
There may be agreements that are linked to reported numbers that will change and changes may be needed to systems and processes to obtain the information need to comply with both the accounting and disclosure requirements of the new standard.