IFRS 16—new guidance requiring lessees to classify all leases as finance leases

IFRS 16 Leases was issued in January 2016 replacing IAS 17 Leases and related Interpretations.

IFRS 16 is effective for annual reporting periods beginning on or after 1 January 2019, with earlier application permitted (as long as IFRS 15 is also applied).

This changes the accounting of leases, substantially for lessees. The new Standard eliminates a lessee’s classification of leases as either operating leases or finance leases. Instead, almost all leases are ‘capitalised’ by recognising a lease liability and right-of-use asset on the balance sheet. There is little change for lessors.

Leasing is a common form of financing, IFRS 16 will increase visibility of companies’ lease commitments and better reflect economic reality. The Standard will also make it easier for users of financial statements to compare companies that lease their assets with companies that borrow money to buy their assets, creating a more level playing field.

The objective of IFRS 16 is to report information that

(a) faithfully represents lease transactions;

(b) provides a basis for users of financial statements to assess the amount, timing and uncertainty of cash flows arising from leases. To meet that objective, a lessee should recognise assets and liabilities arising from a lease.

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. 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.

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