What are IFRS 16 Leases
IFRS 16 starts on 1 January 2019 for annual reports but can be used earlier if IFRS 15 is also used.
The objective of IFRS 16 is to report information that:
- faithfully represents lease transactions and
- helps users of financial statements evaluate the cash flows from leases, including their amount, timing, and uncertainty.
- To meet that objective, a lessee should recognize assets and liabilities arising from a lease.
IFRS 16 introduces a single lessee accounting model and requires a lessee to recognize assets and liabilities for all leases with a term of more than 12 months, unless the underlying asset is of low value. A lessee must recognize a right-of-use asset for using the leased asset. They must also recognize a lease liability for making lease payments.
Standard history
The IASB adopted IAS 17 Leases in April 2001. IAS 17 Leases was originally issued by the IASC in December 1997. IAS 17 Leases replaced IAS 17 Accounting for Leases that was issued in September 1982.
The Board accepted SIC-15 Operating Leases-Incentives in April 2001. This interpretation was first released by the Standing Interpretations Committee of the IASC in December 1998.
In December 2001, the Board released SIC-27 which evaluates transactions involving lease legal form.
SIC‑27 had originally been developed by the Standing Interpretations Committee of the IASC to provide guidance on determining, amongst other things, whether an arrangement that involves the legal form of a lease meets the definition of a lease under IAS 17.
In December 2003 the Board issued a revised IAS 17 as part of its initial agenda of technical projects.
In December 2004 the Board issued IFRIC 4 Determining whether an Arrangement contains a Lease. The Interpretation was developed by the Interpretations Committee to provide guidance on determining whether transactions that do not take the legal form of a lease but convey the right to use an asset in return for a payment or series of payments are, or contain, leases that should be accounted for in accordance with IAS 17.
In January 2016 the Board issued IFRS 16 Leases. IFRS 16 replaces IAS 17, IFRIC 4, SIC‑15 and SIC‑27. IFRS 16 sets out the principles for the recognition, measurement, presentation and disclosure of leases.
In May 2020 the Board issued Covid-19-Related Rent Concessions, which amended IFRS 16. The amendment permits lessees, as a practical expedient, not to assess whether rent concessions that occur as a direct consequence of the covid-19 pandemic and meet specified conditions are lease modifications. Instead, the lessee accounts for those rent concessions as if they were not lease modifications.
In August 2020 the Board issued Interest Rate Benchmark Reform―Phase 2 which amended requirements in IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16 relating to:
- changes in the basis for determining contractual cash flows of financial assets, financial liabilities and lease liabilities;
- hedge accounting; and
- disclosures.
The Phase 2 amendments apply only to changes required by the interest rate benchmark reform to financial instruments and hedging relationships.
Other Standards have made minor consequential amendments to IFRS 16, including Amendments to References to the Conceptual Framework in IFRS Standards (issued March 2018).
Source: IFRS.org
Frequently asked questions
How is a lease classified under IFRS 16?
We classified leases that transfer substantially all the risks and rewards of ownership of an asset as finance leases. We classify all other leases as operating leases.
What is the lease contract under IFRS 16?
IFRS 16 defines a lease as a contract. This contract allows someone to use an asset for a certain time. In exchange for this use, payment is required. A contract can be (or contain) a lease only if the underlying asset is 'identified'.
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