IFRS 16 - Key points of the lease standard

This standard was issued in January 2016 by the International Accounting Standards Board (IASB). It replaced IAS 17, the previous Standard on leases, and all related interpretations:

• IFRIC 4 - Determining whether an Arrangement contains a lease;
• SIC 15 - Operating leases-Incentives; and
• SIC 27 - Evaluating the substance of transactions involving the legal form of a lease.

IFRS 16 contains a single accounting model for lessees but proposes practical expedients. Unless an exemption offered by the Standard is used, a lease is recognised as an asset, referred to as a "right-of-use" asset, and as a liability for the lease payments over the term of the contract.

The main issue is thus now the distinction between a lease and a service contract. Any contract requiring the use of a specified asset and conveying the right to control the use of that asset for a specified period of time will be classified as a lease.

On this topic as on others (e.g. the determination of the lease term - a key parameter in measuring a lease liability), the apparent simplicity of a single model masks a significant use of judgement in the detailed implementation of the Standard.

For lessors, IFRS 16 has brought fewer changes to lease accounting. In particular, the distinction between operating and finance leases has been retained, creating an asymmetry between the lessee and lessor accounting models.

Although the transition to IFS 16 for companies applying IFSs seems to have gone smoothly in 2019, lease accounting has continued to evolve due to amendments to the Standards and agenda decisions reached by the IFRS Interpretations Committee (IFRS IC). At the time of publication of this handbook, several topics are under consideration by the IRS Foundation and could, depending on the direction they take, contribute to changes in the accounting for leases.

This handbook in 80 questions and answers is meant to serve as a useful tool for as many stakeholders as possible, providing clarity and insight on the challenging issues at stake when applying IFRS 16. It does not aim to cover every possible situation that may be encountered in practice, but many topics are examined in detail.

This publication does not consider the consequences of IFRS 18, which is mandatory for financial years beginning on or after 1 January 2027.

10 Key points to remember

1. IFRS 16 defines a lease as a contract, or part of a contract, that conveys the right to control the use of a identified asset for a period of time in exchange for consideration. This definition is common to lessees lessors. The identification of a lease is based on an analysis of the substance of the transaction and ma therefore require significant judgement.
2. IFRS 16 is consistent in many respects with IFRS 15 - Revenue from Contracts with Customers, in its treatment of "unit of account" issues. For example, the requirements of the two standards are broadly sir regarding the identification of separate components within a contract, the allocation of total consideration each component, the grouping of contracts, and the ability to account on a portfolio basis.
3. Determination of the lease term requires an assessment of the period for which it is "enforceable" (enforceability being assessed by considering the broader economics of the lease). Within that period, th lease term represents the period that is reasonably certain from the lessee's point of view. Therefore, the lease term includes the period that the lessee cannot cancel, together with any optional period available t lessee if it is reasonably certain that the lessee will make use of any such option. This assessment, which common to lessees and lessors, will often require the exercise of significant judgement.
4. IFRS 16 is characterised by an asymmetry between the general accounting model applicable to lessees a that applicable to lessors. Whereas the lessee applies a single model resulting in the recognition of a righ use asset and a lease liability at the commencement date of the lease (unless an exemption is used), the lessor model distinguishes between "operating leases" and "finance leases". For leases classified as ope leases, the lessor continues to recognise the leased asset on its balance sheet and recognises rental ince over the lease term. For leases classified as finance leases, the leased asset is replaced by a lease recei (equal to the "net investment in the lease") which generates financial income over the lease term by unwir the discount on the lease receivable.
5. The general accounting model for lessors is substantially the same as that in IAS 17 (the previous lease Standard). However, IFRS 16 introduces new requirements for lessors regarding subleases, lease modifications, sale and leaseback transactions, and disclosures.
6. The right-of-use asset recognised in the financial statements of a lessee is initially measured at its cost. The main component of this cost is the present value of the future lease payments over the lease term, being the initial measurement of the lease liability. Consistently with the accounting for owned assets under IAS 16 - Property, Plant and Equipment, the right-of-use asset is subsequently measured at either depreciated cost or, more rarely, revalued amount.
7. In the same way as a financial liability at amortised cost under IFRS 9 - Financial Instruments, the carrying amount of the lease liability of a lessee increases with the calculation of interest and decreases with the payments made by the lessee. However, unlike IFRS 9, the measurement of a lease liability under IFRS 16 only includes variable payments if they depend on an index or a rate. Therefore, when lease payments comprise only variable payments that do not depend on an index or a rate, no lease liability is recognised on the lessee's balance sheet.
8. Under IFRS 16, changes in the lease liability resulting from a reassessment of the lease liability or a lease modification are recognised as an adjustment to the-right-of-use asset (with some exceptions) rather than in profit or loss.
9. The interaction with the requirements of other IRSs sometimes gives rise to complexity, particularly in the financial statements of a lessee. Examples include deferred tax relating to a lease (solving this issue required an amendment to IAS 12 - Income Taxes in May 2021), the application of the requirements of lAS 37 - Provisions, Contingent Liabilities and Contingent Assets on onerous contracts to leases, and determining the appropriate level at which to perform the impairment test under IAS 36 - Impairment of assets when there is an indication that a right-of-use asset may be impaired
10. Since IFS 16 became effective in 2019, lease accounting has continued to evolve due to amendments to the Standards and agenda decisions reached by the IRS IC. It is therefore important to keep abreast of possible future developments, as certain application issues are still under discussion at the time of publication of this handbook.