---
title: "Understanding IFRS 16: A Guide for Businesses"
description: IFRS 16
---

[Arnold Hill Blog: Insights and Advice for Businesses and Individuals ](https://www.arnoldhill.co.uk/blog)

# [Understanding IFRS 16: A Guide for Businesses](https://www.arnoldhill.co.uk/blog/news/ifrs-16)

 Written by [Arnold Hill](https://www.arnoldhill.co.uk/blog/author/arnold-hill) | Jun 14, 2019 10:15:12 AM

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.***

[View full post](https://www.arnoldhill.co.uk/blog/news/ifrs-16)

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