IFRS 16 – Leases: Complete Guide to Lease Accounting
A comprehensive overview of IFRS 16 lease accounting standards, including recognition, measurement, and practical implementation guidance for lessees and lessors.
IFRS 16 Lease Accounting
Wendell Jeveaux
CEO, Global Region
Wendell leads CPCON's global operations with extensive experience in international accounting standards and lease accounting compliance. He helps multinational organizations navigate complex IFRS requirements and implement effective lease management strategies.
IFRS 16 is the International Financial Reporting Standard that specifies how to recognize, measure, present, and disclose leases. The standard was issued by the International Accounting Standards Board (IASB) in January 2016 and became effective for annual reporting periods beginning on or after January 1, 2019.
What Is IFRS 16?
IFRS 16 replaces the previous lease accounting standard, IAS 17, and brings significant changes to how lessees account for leases. The most notable change is that lessees are now required to recognize most leases on the balance sheet, eliminating the previous distinction between operating and finance leases for lessees.
Under IFRS 16, a lessee recognizes a right-of-use asset and a lease liability at the commencement date of the lease. This approach provides a more faithful representation of a lessee's financial position and makes it easier for users of financial statements to compare companies that lease assets with those that borrow to buy assets.
Key Requirements for Lessees
Recognition
At the commencement date, a lessee recognizes:
- A right-of-use asset representing its right to use the underlying asset
- A lease liability representing its obligation to make lease payments
Measurement of Lease Liability
The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date. These payments include:
- Fixed payments less any lease incentives receivable
- Variable lease payments that depend on an index or rate
- Amounts expected to be payable under residual value guarantees
- The exercise price of a purchase option if reasonably certain to be exercised
- Payments of penalties for terminating the lease
Measurement of Right-of-Use Asset
The right-of-use asset is initially measured at cost, which comprises:
- The amount of the initial measurement of the lease liability
- Any lease payments made at or before the commencement date
- Any initial direct costs incurred by the lessee
- An estimate of costs to dismantle and remove the underlying asset
Exemptions and Practical Expedients
IFRS 16 provides two optional exemptions for lessees:
Short-Term Leases
Leases with a lease term of 12 months or less at the commencement date may be accounted for similarly to operating leases under IAS 17.
Low-Value Assets
Leases of low-value assets (such as tablets, personal computers, small items of office furniture) may also be accounted for similarly to operating leases.
Lessor Accounting
IFRS 16 substantially carries forward the lessor accounting requirements from IAS 17. Lessors continue to classify leases as either operating leases or finance leases and account for them accordingly.
Finance Leases
A lessor classifies a lease as a finance lease if it transfers substantially all the risks and rewards incidental to ownership of the underlying asset. The lessor recognizes assets held under a finance lease as a receivable at an amount equal to the net investment in the lease.
Operating Leases
A lessor classifies a lease as an operating lease if it does not transfer substantially all the risks and rewards incidental to ownership. The lessor recognizes lease payments from operating leases as income on either a straight-line basis or another systematic basis.
Impact on Financial Statements
Balance Sheet Impact
- Increase in total assets (right-of-use assets)
- Increase in total liabilities (lease liabilities)
- Impact on key financial ratios (debt-to-equity, asset turnover)
Income Statement Impact
- Depreciation expense for right-of-use assets
- Interest expense on lease liabilities
- Front-loaded expense pattern compared to straight-line operating lease expense
Implementation Considerations
Organizations implementing IFRS 16 should consider the following:
- Identifying all lease contracts across the organization
- Gathering complete lease data including terms, payments, and options
- Determining appropriate discount rates
- Implementing systems and processes to track lease data
- Training finance teams on new requirements
- Communicating changes to stakeholders
How CPCON Can Help
CPCON provides comprehensive IFRS 16 implementation support, including lease identification, data gathering, system implementation, and ongoing compliance monitoring. Our experienced team helps organizations navigate the complexities of lease accounting and ensure accurate financial reporting.