In January 2016, the International Accounting Standards Board (IASB) issued IFRS 16 Leases which represents the first major overhaul in lease accounting for over 30 years.
The Standard brings fundamental changes to lease accounting that replace previous accounting that is considered no longer fit for purpose. These changes become effective from 1 January 2019.
IFRS 16 will affect most companies involved in leasing that report under International Financial reporting Standards (IFRS). It will have a substantial impact on the financial statements of lessees of property and high value equipment – requiring that leases be placed on-balance sheet by recognising a ‘right-of-use’ asset and a lease liability.
Our Insights into IFRS 16 series summaries key areas of the Standard and aims to assist you in preparing for the changes that you will need to make.
Understanding the discount rate
Our first article considers the topical area of ‘Understanding the discount rate’. Under IFRS 16, discount rates are required to determine the present value of the lease payments used to measure a lessee’s lease liability. Discount rates are also used to determine lease classification for a lessor and to measure a lessor’s net investment in a lease.
In this article we explore the alternative methods prescribed in IFRS 16 to determine discount rates and share our insights to help you understand them.
Our second article relates to the topic of ‘Interim periods’. IFRS 16 must first be applied to accounting periods beginning on or after 1 January 2019, including interim periods beginning on or after that date.
This article considers the application of IFRS 16 in those interim periods and any differences that may arise compared to the requirements of IAS 34 Interim Financial Reporting.
Definition of a lease
Our third article relates to the topic of ‘Definition of a lease’. IFRS 16 changes the definition of a lease from the current evaluation in IFRIC 4 Determining whether an Arrangement contains a Lease and provides guidance on how to apply this new definition. As a result, some contracts that do not contain a lease today will meet the definition of a lease under IFRS 16, and vice versa.
Our article explains the new lease definition and the three key evaluations necessary to determine that the contract is or contains a lease.
Our fourth article looks at the important topic of ‘Lease term’. Determining the correct lease term under IFRS 16 is significant. Firstly, the longer the lease term, the larger the lessee’s right-of-use asset and lease liability will be. Secondly, the length of the lease term determines whether a lease qualifies for the short-term lease exemption. Finally, IFRS 16 contains additional application guidance on how to deal with periods covered by options to extend or terminate a lease. While this detailed guidance can be helpful, it also means there is more to consider when determining the lease term.
Our article explains the key aspects of determining the lease term at commencement date and when it should be reassessed.