IFRS 16: Leasing Standard

IFRS 16 At A Glance

IFRS 16 Leases brings significant changes in accounting requirements for lease accounting, primarily for lessees. 

For lessees, almost all leases are recognized in the statement of financial position as a ‘right-of-use’ asset and a lease liability. There are narrow exceptions to this recognition principle for leases where the underlying asset is of low value and for short term leases (i.e. those with a lease term of 12 months or less).  The asset is subsequently accounted for in accordance with the cost or revaluation model in IAS 16 Property, Plant and Equipment or as investment property under IAS 40 Investment Property. The liability and right-of-use asset are unwound over the term of the lease giving rise to an interest expense and depreciation charge, respectively.

Lessor accounting remains substantially unchanged from IAS 17 Leases. Lessors continue to account for leases as either operating or finance leases depending on whether the lease transfers substantially all the risks and rewards incidental to ownership of the underlying asset to the lessee. Operating leases continue to be recorded as assets in the statement of financial position and lease income is recognized on a straight-line basis over the lease term. For finance leases, a lessor is required to derecognize the underlying asset and record a receivable equal to the net investment in the lease, with a gain or loss on sale. Finance income is subsequently recognized at the rate inherent in the lease over the lease term. 

IFRS in practice: IFRS 16 Leases

IFRS 16 Leases brings significant changes in accounting requirements for lease accounting, primarily for lessees. IFRS 16 replaces the existing suite of standards and interpretations on leases:

• IAS 17 Leases (IAS 17);

• IFRIC 4 Determining whether an Arrangement contains a Lease (IFRIC 4);

• SIC 15 Operating Leases – Incentives (SIC 15);

• SIC 27 Evaluating the Substance of Transactions Involving the Legal Form of a Lease (SIC 27).

 
This BDO In Practice sets out the requirements of IFRS 16 in relation to the classification and measurement of leases from the perspective of lessees and lessors and compares those requirements to the previous standards, primarily IAS 17. It should be noted that the guidance relating to lessor accounting remains largely unchanged from IAS 17, so the focus of this publication is on the requirements for lessees.
 
IFR bulletin: 2020/12 – Implications of COVID-19 for Lessors
IFR bulletin: 2020/11 – Accounting for rent concessions: Lessee FAQs

IFR bulletin: 2020/08 – IASB Issues Amendments to IFRS 16: COVID-19 Related Rent Concessions

On 28 May 2020, the IASB issued amendments to IFRS 16, which provide relief for lessees in accounting for rent concessions granted as a direct consequence of COVID-19. 

The Issue for Lessees

The IASB has received feedback that lessees are experiencing significant operational difficulty in applying the existing requirements of IFRS 16 for rent concessions. Many types of rent concessions provided to lessees as a result of COVID-19 would meet the definition of a lease modification, which require lessees to remeasure the lease liability based on the revised consideration using a revised discount rate. The IASB noted while this requirement is not typically onerous, it becomes challenging to apply for lessees with potentially hundreds or thousands of leases, especially when entities are experiencing significant other operational disruptions due to the effects of COVID-19. Entities are also required to assess whether each change to a lease contract meets the definition of a lease modification, which adds another layer of complexity. The IASB issued an exposure draft in April 2020, which proposed amendments to IFRS 16 to provide operational relief for lessees. Based on the feedback received on the exposure draft, the IASB decided to a addedend IFRS 16, with some changes being made to the original proposals in the exposure draft.

COVID-19

IFR bulletin: 2020/07 – Impairment Implications of COVID-19
IFR bulletin: 2020/03 – Potential effects of the coronavirus outbreak on 2020 reporting periods and onward

Other Documents

2020/13 IFR Bulletin – IFRS Foundation Trustees Consider Sustainability Reporting
Illustrative financial statements – Interim
Illustrative financial statements - Year End