IFRS 16 Leases Booklet – FAQ | IFRS

IFRS 16 Leases Booklet

IFRS 16 Leases Booklet sets out the principles for the recognition, measurement, presentation and disclosure of leases. The objective is to ensure that lessees and lessors provide relevant information in a manner that faithfully represents those transactions. that faithfully represents those transactions. This information gives a basis for users of financial statements to assess the effect that leases have on the financial position, financial performance and cash flows of an entity.

Summary Leases capitalisation on the balance sheet

IFRS 16 includes a single accounting model for all leases by lessees. IFRS 16 Leases Booklet

The main implications of the new standard on current practice for lessees include: IFRS 16 Leases Booklet

  • No more operating leases under IFRS 16 (subject to the exceptions described below)
  • All leases (subject to the exceptions described below) will be capitalised on the balance sheet by recognising a ‘right-of-use’ asset and a lease liability for the present value of the obligation IFRS 16 Leases Booklet
  • No rental expense! i.e. no more straight-line expenses for operating lease costs. All leases will incur a front-end loaded expense, comprising depreciation on the right-of-use asset, and interest on the lease liability
  • When initially measuring the right-of-use asset and a lease liability, non-cancellable lease payments (including inflation-linked payments), as well as payments for option periods which the entity is reasonably certain to exercise, must be included in the present value calculation.

Lessees of retail premises paying contingent (turnover) rentals, and others required to make significant contingent rental payments, will be relieved to know that these will not be capitalised into the right-of-use asset, but will continue to be expensed in profit or loss.

IFRS 16 Leases Booklet

Introduction

Leases capitalisation on the balance sheet
Recognition of a Lease

Identifying a leaseIFRS 16 Leases Booklet

When is an asset identified? – Some explanations
Identified asset
Right to control   /  IFRS 16 – Right to use  / Right to direct the use
Control the use – Right to obtain economic benefits from use
Decision-making rights – How and for what purpose is the asset used?
Does a contract include a lease? – A decision tree
Separation of components of a contract
Combine separate lease contract
Portions of assets

Lessee – Measurement

Impairment test before and after IFRS 16 Leases
Treatment of lease liabilities in impairment of a Cash Generating Unit (CGU)
Impairment of right-to-use assets
Lease liability

Sale and leaseback accounting

Lease cases:IFRS 16 Leases Booklet

Calculation examples:
Case 1
Case 2

Industries and assets most impacted Leases capitalisation on the balance sheet

IFRS 16 Leases BookletIFRS 16 will result in higher debt levels and interest costs (particularly in the earlier years of a lease) for any entities operating in industries that currently have many operating leases of high value that are material to their balance sheets. For example:

  • Retailers – their shops or mall space, particularly where leases include multiple renewal options (e.g. anchor tenants in a shopping mall),
  • Mines and mining services companies, where there is a significant amount of expensive equipment held on operating leases,
  • Airlines – millions, and in some cases, billions of dollars will be required to be capitalised on balance sheet for aircraft,
  • Cruise ship operators – as for airlines above, IFRS 16 Leases Booklet
  • Businesses with large fleets of motor vehicles, including cars and trucks. IFRS 16 Leases Booklet

See also: The IFRS Foundation

IFRS 16 will result in higher debt levels and interest costs (particularly in the earlier years of a lease) for any entities operating in industries that currently have many operating leases of high value that are material to their balance sheets. For example: s. For example: s. For example: