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.
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:
- The customer has the right to direct how and for what the asset is used throughout its period of use; or
- 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 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 will continue to account for leases with the distinction of an operating and finance lease.
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.