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IFRS 16, ‘Leases’ was published the in January 2016 and is mandatory from 2019. IFRS 16 will replace the current guidance in IAS 17. IFRS 16 defines a lease as a contract, or part of a contract, that conveys the right to use an asset (the underlying asset) for a period of time in exchange for consideration.
Under IFRS 16 lessees have to recognise a lease liability reflecting future lease payments and a ‘right-of-use asset’ for almost all lease contracts. This is a significant change compared to IAS 17, under which lessees were required to make a distinction between a finance lease (on balance sheet) and an operating lease (off balance sheet). IFRS 16 gives lessees optional exemptions for certain short-term leases and leases of low-value assets.
In the income statement lessees will have to present interest expense on the lease liability and depreciation on the right-of-use asset. In the cash flow statement the part of the lease payments that reflects interest on the lease liability can be presented as an operating cash flow (if it is the entity’s policy to present interest payments as operating cash flows). Cash payments for the principal portion of the lease liability are classified within financing activities. Payments for short-term leases, for leases of low-value assets and variable lease payments not included in the measurement of the lease liability are presented within operating activities.
As under IAS 17, the lessor has to classify leases as either finance or operating, depending on whether substantially all of the risks and rewards incidental to ownership of the underlying asset have been transferred. For a finance lease the lessor recognises a receivable, and for an operating lease the lessor continues to recognise the underlying asset.
IFRS 16 adds significant new, enhanced disclosure requirements for both lessors and lessees.
IFRS 16 is effective for annual reporting periods beginning on or after 1 January 2019. Earlier application is permitted, but only in conjunction with IFRS 15, ‘Revenue from contracts with customers’. On transition, lessees can choose between full retrospective application or a ‘simplified approach’ that includes certain reliefs and does not require a restatement of comparatives. In addition, as a practical expedient entities are not required to reassess whether a contract is, or contains, a lease at the date of initial application (that is, such contracts are ‘grandfathered’).