To ensure that lessees and lessors provide relevant information in a manner that faithfully represents lease transactions.
Aims to improve comparability of financial statements between entities that lease assets and those that borrow to buy assets, and between entities that lease assets under different types of lease arrangements.
IFRS 16 introduced a single lessee accounting model, requiring lessees to recognize assets and liabilities for almost all leases.
Applies To:
All leases, including subleases, except for specific exclusions.
Exclusions:
Leases to explore for or use minerals, oil, natural gas, and similar non-regenerative resources (IFRS 6).
Leases of biological assets within the scope of IAS 41 Agriculture held by a lessee.
Licensing agreements for items such as motion picture films, video recordings, plays, manuscripts, patents, and copyrights within the scope of IAS 38 Intangible Assets.
Service concession arrangements within the scope of IFRIC 12 Service Concession Arrangements.
An entity can choose to apply IFRS 16 to leases of intangible assets other than those listed above.
Lease = Right to Control an Identified Asset:
Asset is typically explicitly specified in a contract (e.g., specific serial number, floor of a building).
Can be implicitly specified at the time it is made available for use by the customer.
Supplier does not have a substantive right to substitute the asset throughout the period of use. If substantive substitution rights exist, it's likely not an identified asset.
Right to Control the Use of an Identified Asset: A customer has this right if, throughout the period of use, it has both of the following:
The right to obtain substantially all of the economic benefits from use of the identified asset.
The right to direct the use of the identified asset (i.e., direct how and for what purpose the asset is used).
Single On-Balance Sheet Model:
At the commencement date, a lessee recognizes a Right-of-Use (ROU) asset and a lease liability for virtually all leases.
This is a major change from IAS 17, which distinguished between finance leases (on-balance sheet) and operating leases (off-balance sheet for lessees).
Initial Measurement:
| Item | Measurement Basis |
| Lease Liability |
Present value of the lease payments not yet paid at commencement date. Discounted using the interest rate implicit in the lease, or if not readily determinable, the lesseeā€™s incremental borrowing rate. |
| Right-of-Use (ROU) Asset |
Measured at cost, which comprises:
The amount of the initial measurement of the lease liability.
Any lease payments made at or before commencement date, less any lease incentives received.
Any initial direct costs incurred by the lessee.
An estimate of costs to dismantle/remove the underlying asset, restore the site, or restore the asset (per IAS 37).
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Subsequent Measurement:
Increased to reflect interest on the lease liability (using effective interest method).
Reduced by lease payments made.
Remeasured for changes in lease term, assessment of purchase option, changes in variable payments linked to index/rate, or changes in residual value guarantees.
Typically measured at cost less accumulated depreciation and accumulated impairment losses (IAS 36).
Depreciated from commencement date to the earlier of the end of its useful life or the end of the lease term (unless ownership transfers or purchase option reasonably certain, then depreciate over useful life).
Adjusted for certain remeasurements of the lease liability.
Lease Payments Include:
Fixed payments (less any lease incentives receivable).
Variable lease payments that depend on an index or a rate (initially measured using index/rate at commencement).
Amounts expected to be payable by the lessee under residual value guarantees.
The exercise price of a purchase option if the lessee is reasonably certain to exercise that option.
Payments of penalties for terminating the lease, if the lease term reflects the lessee exercising an option to terminate.
Variable lease payments not dependent on an index/rate (e.g., based on % of sales) are expensed in P&L when the event triggering payment occurs.
Optional Exemptions from Full ROU/Liability Recognition:
Short-term leases: Leases with a lease term of 12 months or less at commencement date, and containing no purchase option. Election made by class of underlying asset.
Leases of low-value assets: Leases for which the underlying asset is of low value when new (e.g., tablets, personal computers, small office furniture). Assessed on an absolute basis, not materiality to lessee. Election made on a lease-by-lease basis. (IASB suggests around USD 5,000 as a guide for "low value when new").
Accounting Treatment if Exemption Taken:
Recognize lease payments as an expense on a straight-line basis over the lease term or another systematic basis if more representative of benefit pattern. (Similar to old IAS 17 operating lease accounting).
Dual Model (Classification is Key):
| Lease Type | Accounting Treatment by Lessor |
| Finance Lease |
A lease that transfers substantially all the risks and rewards incidental to ownership of an underlying asset.
Lessor derecognizes the underlying asset and recognizes a net investment in the lease (lease receivable). Finance income recognized over lease term based on a pattern reflecting constant periodic rate of return. |
| Operating Lease |
A lease that does not transfer substantially all the risks and rewards of ownership.
Lessor keeps the asset on its balance sheet. Recognizes lease income on a straight-line basis or another systematic basis if more representative. Depreciates the leased asset per IAS 16. |
Classification Criteria (Indicators that a lease is a Finance Lease - one or more):
Lease transfers ownership of the asset to the lessee by the end of the lease term.
Lessee has an option to purchase the asset at a price expected to be sufficiently lower than fair value at exercise date (bargain purchase option).
Lease term is for the major part of the economic life of the asset.
At inception, the present value of lease payments amounts to at least substantially all of the fair value of the leased asset.
The leased assets are of such a specialized nature that only the lessee can use them without major modifications.
Other indicators: lessee bears lessor's losses if lease cancelled; lessee absorbs gains/losses from FV fluctuations of residual value.
Assessment Criteria:
An entity applies the requirements of IFRS 15 *Revenue from Contracts with Customers* to determine whether the transfer of an asset in a sale and leaseback transaction qualifies as a sale.
If the Transfer IS a Sale:
Seller-lessee: Measures the ROU asset arising from the leaseback at the proportion of the previous carrying amount that relates to the right of use retained. Recognizes only the amount of any gain or loss that relates to the rights transferred to the buyer-lessor.
Buyer-lessor: Accounts for the purchase under applicable Standards, and for the lease under IFRS 16 lessor accounting.
If the Transfer is NOT a Sale:
Seller-lessee: Continues to recognize the transferred asset and recognizes a financial liability equal to the transfer proceeds (accounted for under IFRS 9).
Buyer-lessor: Recognizes a financial asset equal to the transfer proceeds (accounted for under IFRS 9).
Lessee Accounting for Modifications:
If a lease modification is not accounted for as a separate lease: Remeasure the lease liability using a revised discount rate. Adjust the ROU asset for the remeasurement of the liability (decrease ROU if liability decreases, potentially to P&L if ROU is zero).
Account for as a separate lease if both conditions are met:
The modification increases the scope of the lease by adding the right to use one or more underlying assets; AND
The consideration for the lease increases by an amount commensurate with the stand-alone price for the increase in scope and any appropriate adjustments.
Lessor Accounting for Modifications:
Operating Lease Modification: Account for as a new lease from effective date of modification, considering any prepaid/accrued lease payments relating to original lease as part of lease payments for new lease.
Finance Lease Modification: If would have been classified as operating lease had modification been in effect at inception, account for as sale and leaseback. Otherwise, apply IFRS 9 modification/derecognition rules to the net investment.
Lessee Must Disclose (Examples):
| Area | Examples of Disclosures |
| ROU Assets | Carrying amount by class of underlying asset; Depreciation charge by class; Additions; Reconciliation of carrying amounts. |
| Lease Liabilities | Maturity analysis of lease liabilities (separately from other financial liabilities); Interest expense on lease liabilities; Weighted average lessee's incremental borrowing rate. |
| Lease Expenses & Cash Flows | Expense relating to short-term leases (if exemption taken); Expense relating to low-value asset leases (if exemption taken); Expense relating to variable lease payments not included in liability measurement; Total cash outflow for leases. |
| Other | Gains/losses from sale and leaseback; Information about significant variable lease payment terms, extension/termination options, residual value guarantees. |
Lessor Must Disclose (Examples):
Finance Leases: Selling profit/loss; Finance income on net investment; Reconciliation of gross investment to PV of minimum lease payments receivable; Unguaranteed residual values.
Operating Leases: Lease income (separately for variable payments not dependent on index/rate); Reconciliation of carrying amount of underlying assets subject to operating leases; Description of leasing arrangements.
Information about its risk management strategy for rights it retains in underlying assets.
Maturity analysis of lease payments receivable (undiscounted).
Initial Application Date:
Effective for annual reporting periods beginning on or after 1 January 2019. Early application permitted if IFRS 15 also applied.
Transition Approaches for Lessees:
| Method | Description & Key Features |
| Full Retrospective (IAS 8) |
Apply IAS 16 to each prior reporting period presented in accordance with IAS 8, restating comparatives. Complex and costly. |
| Modified Retrospective |
Recognize cumulative effect of initially applying IFRS 16 as an adjustment to opening retained earnings (or other equity) at the date of initial application. Comparatives are NOT restated.
Two options for measuring ROU asset at transition for operating leases under IAS 17:
Option 1: ROU asset = Lease liability (adjusted for prepayments/accruals). Simpler.
Option 2: ROU asset = As if IFRS 16 had been applied since lease commencement (discounted using incremental borrowing rate at transition date). More complex.
Various practical expedients available (e.g., for lease term, discount rates, initial direct costs).
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Lessors generally do not make significant adjustments on transition unless they are intermediate lessors in a sublease.
Determining the lease term (assessing likelihood of exercising extension or termination options).
Determining the appropriate discount rate (interest rate implicit in lease or lessee's incremental borrowing rate).
Assessing whether a contract contains a lease (identifying an asset and right to control its use).
Separating lease and non-lease components of a contract and allocating consideration between them. (Practical expedient allows not separating if immaterial or improves comparability).
Assessing whether exercise of a purchase option is reasonably certain.
Estimating variable lease payments dependent on an index/rate for initial liability measurement.
Determining if an asset qualifies as low-value for the exemption.
