IFRS 16 is a new accounting standard that requires lessees to account for lease contracts differently from the previous standard, IAS 17. The new standard is effective for annual periods beginning on or after January 1, 2019, and is expected to have a significant impact on companies that lease assets.
Under IAS 17, lessees were required to classify leases as either finance leases or operating leases, based on certain criteria. Finance leases were recognized on the balance sheet as assets and liabilities, while operating leases were treated as off-balance sheet items.
IFRS 16, however, requires that all leases be recognized on the balance sheet as assets and liabilities, regardless of their classification. This means that lessees will need to account for the right to use the leased asset as an asset, and the lease payments as a liability.
The lease liability will be measured as the present value of lease payments, discounted using the lessee’s incremental borrowing rate. The right-of-use asset will be initially measured at the lease liability amount, adjusted for any initial direct costs and prepaid or accrued lease payments.
Under IFRS 16, lessees will also need to recognize interest expense on the lease liability, and depreciation on the right-of-use asset. Interest expense will be calculated by applying the lessee’s incremental borrowing rate to the lease liability balance, while depreciation will be calculated based on the asset’s useful life.
The new standard also introduces new disclosure requirements, such as the amount and nature of lease liabilities, key assumptions made in determining the lease liability and right-of-use asset, and a reconciliation of lease liabilities from the beginning to the end of the period.
Overall, IFRS 16 will require lessees to put more effort into managing their lease contracts and accounting for them in their financial statements. The new standard will also provide investors with more transparency into companies’ lease commitments and the associated financial obligations. Companies will need to carefully consider the impact of the new standard on their financial statements and ensure that they are ready to comply with the new requirements.