IFRS 16 relates to accounting for leases and was issued in January 2016 by The IASB (International Accounting Standards Board) and replaces IAS 17.

IAS 17 Leases (developed by the International Accounting Standards Committee) is currently being replaced by IFRS 16 Leases (developed by the International Accounting Standards Board). The scope is generally similar in that both standards include all contracts which convey a right-of-use (ROU) to an asset.

In order to operate, businesses may require assets for use in the business in different ways, with purchased assets currently being treated in a different manner to assets acquired through an operating lease which would not appear on the balance sheet. Fundamentally, the purpose of the changes are to enhance comparability and transparency on Balance Sheets so that users can compare companies on an equivalent basis regardless of the way they acquire their assets.

Under IAS 17, there are two types of Lease: Finance and Operating. A Finance Lease is a lease that transfers substantially all of the risks and rewards associated with the ownership of an asset to the lessee with all others being Operating Leases. According to IAS 17, businesses must classify all of their leases into one of these classes. The classification being on the basis of substance over form, so that the legal basis of the agreement cannot hide the true nature of the agreement. However, this still leaves the option for operating leases to take assets and their associated liabilities off the balance sheet. IFRS 16 eliminates this as all leases, regardless of their form will be treated in the same way.

The greatest impact of the changes will be to bring operating leases onto the balance sheet – this could have a significant impact on many key ratios for some businesses that hold large numbers of operating leases.

The table below summarises the key differences between the standards:

opalwave IFRS 16 and IAS 17 table

There do remain exceptions in IFRS 16 for low value leased assets (there is no absolute value definition of what classifies as low value, but examples given in the guidance are personal computers and furniture) and also for assets with a lease term of less than 12 months.

The impacts on Lessors are likely to be very different as treatment under IRFS 16 and IAS 17 are pretty much the same thing. However, the business impact of the changes on lessees will certainly drive changes in customer demands and relationships.