IFRS 16: Leases
The IFRS 16 “Leases” establishes the leases’ recognition, measurement, and presentation principles. This standard intends to ensure that relevant information provided by lessee and lessors related to a lease faithfully represents those transactions’ financial impact.
IFRS 16 brought significant changes to lease accounting in over three decades. Since its introduction on 1 January 2019, IFRS 16 will affect most companies reporting under IFRS. It will significantly impact the financial statements of lessees.
IFRS 16 takes a novel approach to accounting for leases, called the ‘right-of-use’ model. It means that if a company has control over, or the right to use an asset under a lease contract, that item is classified as an asset for accounting purposes.
IFRS 16 no longer allows significant financial liabilities to be held off-balance sheet, as the standard’s objective is to ensure that companies’ financial statements reflect all the information for the leased assets and related liabilities in a standardized way to bring transparency.
The IFRS 16 can further complicate accounting as costs for maintenance, cleaning, etc., must be separated from the principal lease payments if they’re included and reported separately.
Why do we need IFRS 16?
The objective is to ensure that companies all account for the leased items, making their existence more financially transparent. Previously, businesses could hold significant financial liabilities related to their operating leases, which is an off-the-balance sheet item and gives a skewed view of their overall financial status.
IFRS 16 is Replacing the following standards and interpretations.
- IAS 17 -“Leases.”
- IFRIC 4 – “Determining whether an Arrangement contains a Lease.”
- SIC 15 -“Operating Leases – Incentives.”
- SIC 27 -“Evaluating the Substance of Transactions Involving the Legal Form of a Lease.”
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