12 Mar What is IFRS 16?
What is IFRS 16? – IFRS 16 relates to accounting for leases and was issued in January 2016 by The IASB (International Accounting Standards Board) and replaces IAS 17.
The purpose of the standard is to ensure that leased items are reported in a manner that faithfully represents the transactions and ensures that financial statements reflect the amount, timing and uncertainty of cash flows arising from leases.
To achieve this, the standard dictates that, for a lessee where a lease is for over 12 months and not classed as a small item, a single accounting model will now be applied in which the leased item should be recognised and treated as an asset and the present value of the lease payments due under the lease as a financial liability.
The right of use assets are then depreciated similarly to other non-financial assets such as property, plant and equipment. The liabilities under the lease are also treated in the same way as other financial liabilities, with separation in the cash flow statement of total amounts paid into principal (forms part of financing activities) and into interest which would be presented as either financing or operating activities.
The liability is initially measured on a present value basis and should include all anticipated payments, that therefore must include all of the non-cancellable payments as well as any payments for optional extensions if there is a reasonable likelihood that the option to extend (or not to terminate) will be taken.
For lessors, IFRS 16 requires that leases continue to be classified as either operating or finance leases which continue to be treated substantially as they were under IAS 17.
IFRS 16 comes into effect for reporting periods starting from 1 January 2019, although earlier adoption is permitted. It should be noted that transitional provisions have been included which allow for existing finance leases to continue to be treated as finance leases and existing operating leases having an option for full or limited retrospective restatement.
A detailed analysis of the effects of IFRS 16 can be found at https://www.ifrs.org/-/media/project/leases/ifrs/published-documents/ifrs16-project-summary.pdf