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In January 2016, the IASB finished its long lasting project on lease accounting and published IFRS 16, 'Leases', which replaces the current guidance in IAS 17. This will be a far-reaching change in accounting by lessees in particular.
The standard applies to annual periods beginning on or after 1 January 2019 (subject to EU endorsement) with earlier application permitted if IFRS 15, 'Revenue from contracts with customers', is also applied.
For further details see the IFRS 16 topic home page.
A lease gives one party (the lessee) the right to use an asset over an agreed period of time in return for payment to the lessor. Leasing is an important source of medium- and long-term financing; accounting for leases can have a significant impact on lessees' and lessors' financial statements.
Leases are classified as finance or operating leases at inception, depending on whether substantially all the risks and rewards of ownership transfer to the lessee. Under a finance lease, the lessee has substantially all of the risks and reward of ownership. All other leases are operating leases. Leases of land and buildings are considered separately under IFRS.
Under a finance lease, the lessee recognises an asset held under a finance lease and a corresponding obligation to pay rentals. The lessee depreciates the asset.
The lessor recognises the leased asset as a receivable. The receivable is measured at the 'net investment' in the lease – the minimum lease payments receivable, discounted at the internal rate of return of the lease, plus the unguaranteed residual that accrues to the lessor.
Under an operating lease, the lessee does not recognise an asset and lease obligation. The lessor continues to recognise the leased asset and depreciates it. The rentals paid are normally charged to the income statement of the lessee and credited to that of the lessor on a straight-line basis.
Linked transactions with the legal form of a lease are accounted for on the basis of their substance – for example, a sale and leaseback where the seller is committed to repurchase the asset may not be a lease in substance if the 'seller' retains the risks and rewards of ownership and substantially the same rights of use as before the transaction.
Equally, some transactions that do not have the legal form of a lease are in substance leases if they are dependent on a particular asset that the purchaser can control physically or economically.