At a glance
This applies to all entities that apply IFRS 16, ‘Leases’.
Transitioning to a new accounting standard is not straightforward. With the introduction of IFRS 16, there are several accounting and disclosure considerations which need to be taken into account.
Below are some common mistakes to look out for and questions to ask yourself when you are assessing IFRS 16 accounting and disclosures.
What is the issue?
This In brief provides you with a number of reminders on IFRS 16, the new accounting standard for leases, along with references to useful sections of Inform where you can find more information.
What is the impact and for whom?
- The lease term cannot exceed the period for which the lease is enforceable. The IFRS Interpretations Committee (IC) concluded that the enforceable period of a lease under IFRS 16 reflects broader economics, not just legal rights and termination cash payments. Lessees that had previously interpreted the enforceable period more narrowly will need to consider the impact, which could increase recognised lease liabilities. See In brief 2019-15 for further details.
Useful life of non-removable leasehold improvements
- The IC concluded that, when assessing the useful life of leasehold improvements, the lessee should consider whether the lease term of the related lease is shorter than the economic life of the leasehold improvements and, if so, whether the lessee expects to use the leasehold improvements beyond that lease term. If the improvements will not be used beyond the lease term, the useful life of the leasehold improvements is the same as the lease term.
- Restoration provisions – Restoration provisions are required where a lessee is obliged to return the leased asset to the lessor in a specific condition or to restore the site on which the leased asset has been located. Paragraph 24(d) of IFRS 16 states that the initial measurement of the right-of-use asset includes removal and restoration costs (as illustrated in IFRS manual of accounting FAQ 16.85.6 and FAQ 15.71.1).
- Provisions for wear and tear are recognised as an expense over the tenancy period, since IFRS 16 only allows restoration and removal costs to be capitalised if they relate to an asset’s installation, construction or acquisition (as illustrated in IFRS manual of accounting FAQ 16.85.5). This is consistent with how such costs should previously have been accounted for under IAS 17.
Presentation in the cash flow statement
- The portion of lease payments that represents cash payments for the principal portion of the lease liabilities is presented as cash flows resulting from financing activities.
- The portion of lease payments that represents the interest portion is presented either as operating cash flows or as cash flows resulting from financing activities in accordance with the entity’s accounting policy regarding the presentation of interest payments (IFRS manual of accounting para 7.34).
- Lease payments which were not included in the measurement of the lease liabilities (including certain variable payments, short-term leases and leases of low-value assets) are presented as operating cash flows.
- Payments made before the commencement of a lease are generally classified as investing cash flows, because these are cash payments for the acquisition of the right-of-use asset.
Disclosures about future cash outflows that are not reflected in the measurement of lease liabilities and IFRS 7 disclosures
- Paragraph 59 of IFRS 16 requires disclosures about future cash outflows to which the lessee is potentially exposed that are not reflected in the measurement of lease liabilities. This includes exposure arising from:
- variable lease payments (as described in para B49);
- extension options and termination options (as described in para B50);
- residual value guarantees (as described in para B51); and
- leases not yet commenced to which the lessee is committed.
- Disclosures of lease obligations are excluded from the scope of IAS 39 or IFRS 9; however, such obligations are financial instruments, and therefore certain IFRS 7 disclosures are required, such as exposure to market risk (for example, currency risk, or interest rate risk for leases that vary with a benchmark interest rate).
- IFRS 9 category disclosures, as set out in paragraph 8 of IFRS 7, do not apply to an IFRS 16 lease obligation.
- The same maturity analysis disclosure requirements apply to lease liabilities as those applied to other financial liabilities. These can be disclosed either in a separate note or as a separate line in the disclosure required for other financial liabilities.
IAS 7 financing activities reconciliation
- Paragraph 44A of IAS 7 requires entities to disclose the changes in liabilities that arise from financing activities, including both financing cash flows and non-cash changes. This disclosure should include IFRS 16 lease liabilities, because these are a form of financing.
Impact on other standards
- As a reminder, we have also issued In depth 2019-02 which outlines the interaction between IFRS 16 and other standards such as IAS 36, ‘Impairment of Assets’.
Which entities does this guidance apply to?
The guidance in this In brief applies to all engagement teams performing audits of IFRS and FRS 101 annual reports.
When does it apply?
IFRS 16 is effective for annual reporting periods beginning on or after 1 January 2019.
Where do I get more details?
Further guidance on the application of the accounting standards for leases can be found in the IFRS manual of accounting chapter 15.