Understanding IFRS 16: A Guide for Businesses

IFRS 16 becomes compulsory for accounting periods commencing
on or after 1 January 2019.

This new standard represents a significant overhaul of the
existing standard (IAS 17) for lessees, and will effectively see that all
leases are accounted for as finance leases, removing the existing distinction
between operating and finance leases. As a result, all leases will be brought
onto the Statement of Financial Position as ‘right-of-use assets’, with a corresponding leasing liability.

These new requirements are likely to impact many entities
who prepare their financial statements under International Financial Reporting
Standards (IFRS), with the standard covering all leases of land and buildings.
The result will be new assets and new (and significant) debts on the Statement
of Financial Position.

Right-of-use assets

IFRS 16 determines an asset to be a ‘right-of-use asset’ when, from the start of the lease, a lessee
obtains a right to use the underlying asset for a period of time.

A customer has the right to control the use of an identified
asset if either:

1. The customer has the right to direct how and for
   what the asset is used throughout its period of use; or
2. The decision about use are pre-determined and
   the customer has the right to operate the asset throughout the period of use,
   without the supplier having the right to change these operating instructions.

Identifying a lease

All lease contracts will need to be reviewed carefully for
any ‘service’ components. An example of this would be for cleaning services
provided as part of a lease of a building. The accounting for the service
components would be different, with the service costs expensed over the lease
term on a straight-line or systematic basis.

For simplicity, the new standard does allow for a lessee to choose not to separate services from a lease.

Exemptions

Exemptions within IFRS 16 are few and far between. Under the
following circumstances, an exemption may be taken:

• Short
  term leases – defined as a lease that has a term of 12 months or less
• Low value
  items – possible examples of thismay
  be leases of electronic equipment such as tablets as well as small items of
  furniture.            

Lessors

Lessors will continue to account for leases with the distinction of an operating and finance lease.                                                                                                                                                                                      

FRS 102

Please be aware that this accounting standard does not apply to entities who prepare their
financial statements under FRS 102. The existing approach to accounting for
leases under FRS 102 will remain the same for now, although there are
suggestions that accounting for leases will become more aligned to IFRS 16 in
the future.

Should you have any questions with regards to accounting for leases under IFRS 16, please get in touch.

The information in this article is believed to be factually correct at the time of writing and publication, but is not intended to constitute advice.  No liability is accepted for any loss howsoever arising as a result of the contents of this article. Specific advice should be sought before entering into, or refraining from entering into any transaction.