Leases

Find out how lease accounting standard IFRS 16 may change the way you report leases

In Brief

  • IFRS 16 Leases replaces IAS 17 as the international lease accounting standard
  • It is in effect for periods starting on or after 1 January 2019; some are allowed to adopt early
  • IFRS 16 aims to provide a clearer, more comparable picture of true financial exposure than IAS 17

What’s changing?

For lessors

In IFRS 16 Leases, accounting remains largely unchanged for lessors.

For lessors, leases are still classified as either operating leases or finance leases, and each type is accounted for differently. However, existing leases may need to be restructured due to changing customer demands under the new standard.

For lessees

The key changes for lessees are:

  • Leases will no longer be classified as either operating leases or finance leases
  • Right-of-use assets and lease liabilities will be recognised on the balance sheet, initially measured at present value of unavoidable future lease payments
  • Depreciation on right-of-use assets and interest on lease liabilities will be recognised in the income statement over the lease term
  • In the cash flow statement, the total amount of cash paid will be separated into principal and interest
  • Lessees with short-term leases (less than 12 months) and leases of low-value assets (eg personal computers) do not need to recognise assets and liabilities
  • For entities with material off-balance-sheet leases, financial metrics derived from assets and liabilities (eg leverage ratios) will change. Some entities may therefore no longer comply with their debt covenants.

Who is affected?

Entities need to consider the new standard’s potential impact on many commonly used financial metrics and covenants, and on systems and controls.

Some sectors will be more affected by the changes than others. Airlines, retailers, and the travel and leisure industry are expected to feel the greatest impact.

When does IFRS 16 commence?

IFRS 16 takes effect for annual periods beginning on or after 1 January 2019. Early adoption is permitted if IFRS 15 Revenue from Contracts with Customers is also applied.

The new standard must be applied retrospectively to leases already in effect on the transition date, and lessees can choose either a full or modified retrospective transition approach.

Project summary

IFRS 16 Leases: Project Summary and Feedback Statement

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Effects analysis

IFRS 16 Leases: Effects Analysis

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