Objective: IFRS 16 establishes principles for the recognition, measurement, presentation and disclosure of leases. The objective is to ensure that lessees and lessors provide relevant information that faithfully represents lease transactions.
- Applies to all leases including subleases
- Does not apply to:
- Leases to explore minerals
- Biological assets
- Service concession arrangements
- Licenses of intellectual property
- Key change: Eliminates the distinction between operating and finance leases for lessees
Lease: A contract that conveys the right to use an asset for a period of time in exchange for consideration.
Right-of-Use Asset: An asset that represents a lessee's right to use an underlying asset for the lease term.
Lease Liability: The present value of lease payments not yet paid.
Lease Term: Non-cancellable period plus periods covered by options to extend/terminate if reasonably certain to be exercised.
Discount Rate: Interest rate implicit in the lease or lessee's incremental borrowing rate.
Single Model Approach: All leases (except short-term and low-value) are recognized on balance sheet.
| Element | Initial Measurement |
|---|---|
| Right-of-Use Asset | = Lease liability + Initial direct costs + Prepayments - Lease incentives |
| Lease Liability | = Present value of: • Fixed payments • Variable payments based on index/rate • Residual value guarantees • Purchase options (if reasonably certain) • Termination penalties (if reasonably certain) |
| Element | Subsequent Measurement |
|---|---|
| Right-of-Use Asset | Cost model: • Depreciated over shorter of useful life or lease term • Impairment tested under IAS 36 |
| Lease Liability | • Increased by interest (effective interest method) • Reduced by lease payments • Remeasured when changes in:
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Dual Model Maintained: Lessors continue to classify leases as either finance leases or operating leases.
Finance Lease: Transfers substantially all risks and rewards of ownership.
Operating Lease: Does not transfer substantially all risks and rewards.
Finance Lease Recognition Conditions: A lease is classified as a finance lease if it transfers substantially all the risks and rewards incidental to ownership. Indicators include:
- Ownership transfers to lessee by end of lease term
- Lessee has option to purchase at price expected to be sufficiently lower than fair value
- Lease term is for major part of asset's economic life
- Present value of lease payments equals substantially all of fair value
- Specialized nature of asset - only lessee can use without major modifications
- Losses from cancellation borne by lessee
- Gains/losses from residual value fluctuations accrue to lessee
- Lessee can continue lease for secondary period at rent substantially below market
| Aspect | Finance Lease | Operating Lease |
|---|---|---|
| Asset Recognition | Derecognize underlying asset | Continue recognizing underlying asset |
| Receivable Recognition | Recognize net investment in lease | No receivable recognized |
| Revenue Recognition | Interest revenue using effective interest method | Lease income on straight-line basis |
| Asset Measurement | N/A (asset derecognized) | Depreciate asset over useful life |
Sale and Leaseback: A transaction where an entity (seller-lessee) transfers an asset to another entity (buyer-lessor) and leases that same asset back.
Key Assessment: First determine whether the transfer qualifies as a sale under IFRS 15.
| Scenario | Accounting Treatment |
|---|---|
| Transfer is a Sale |
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| Transfer is NOT a Sale |
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Scenario: Company sells building and leases it back for 10 years
• Carrying amount of building: $800,000
• Sale price: $1,000,000
• Fair value of building: $1,000,000
• Present value of lease payments: $600,000
Calculation:
Total gain: $1,000,000 - $800,000 = $200,000
Proportion transferred: ($1,000,000 - $600,000) / $1,000,000 = 40%
Gain to recognize: $200,000 × 40% = $80,000
Right-of-use asset: $800,000 × ($600,000 / $1,000,000) = $480,000
| Exemption | Description | Conditions |
|---|---|---|
| Short-term Leases | Lessee can elect not to recognize assets and liabilities | Lease term of 12 months or less |
| Low-value Assets | Lessee can elect not to apply recognition requirements | Underlying asset of low value when new (e.g., < $5,000) |
| Portfolio Application | Can be applied to portfolio of leases | Leases with similar characteristics |
Comprehensive Disclosures: Both lessees and lessors must provide extensive information about leasing activities.
| For Lessees | For Lessors |
|---|---|
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