IFRS 16 replaces IAS 17: Leases, IFRIC 4: Determining whether an arrangement contains a lease, SIC 15: Operating Lease – Incentives and SIC 27: Evaluating the substance of transaction involving the legal form of a lease.
Basic difference between IFRS 16 and IAS 17
- Definition of a lease
- Treatment of operating leases in the books of the lessee.
|IFRS 16||IFRS 17|
|Definition of a lease|
|A contract is, or contains, a lease if the contract:
||A lease in an agreement whereby the lessor conveys to the lessee in return for a payment or series of payments the right to use an asset for an agreed period of time.||Treatment of operating leases in the books of the lessee|
|There is no concept of operating leases. All leases are given the same accounting treatment as mentioned in IAS 17 for finance leases.||Lease payments under an operating lease shall be recognised as an expense on a straight-line basis over the lease term unless another systematic basis is more representative of the time pattern of the user’s benefit.|
Disclosure in the financial statements of a lessee
Interest expense on the lease liabilities and depreciation charge for the right of use asset should be shown separately. In the statement of cash flow:
- Cash payments for the principal portion of the lease liability should be disclosed within financing activities,
- Cash payments for interest portion as interest,
- Short-term lease payments, payments for leases of low value assets and variable lease payments not included in the measurement of the lease liability should be disclosed within operating activities.
A lessee shall disclose information about its leases for which it is a lessee in a single note or separate section in its financial statements. However, a lessee need not duplicate information that is already presented elsewhere in the financial statements, provided that the information is incorporated by cross reference in the single note or separate section about leases.
A Lessee shall disclose the following amounts for the reporting period:
- Depreciation charge for right of use assets by class of underlying asset.
- Interest expense on lease liabilities.
- Lease expense for lease period less than one year which are not included in the measurement of lease
- Lease expense for low value assets which are not included in the measurement of lease liabilities.
- Variable lease payments which are not included in the measurement of lease liabilities.
- Income from sub leasing right of use assets.
- Total cash outflow for leases.
- Additions to right of use assets.
- The carrying amount or right of use assets at the end of the reporting period by class of underlying asset.
- Gain or losses arising from sale and lease back transactions.
Additional information to be disclosed, if applicable
- The nature of the lessee’s leasing activities.
- 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;
- Extension options and termination options;
- Residue value guarantees;
- Leases not yet commenced to which the lessee is committed.
- Restriction or covenants imposed by leases.
- Sale and lease back transactions.
Disclosure in the financial statements of a lessor
A Lessor shall disclose the following amounts for the reporting period:
- For Finance leases
- Selling profit or loss
- Finance income on the net investment in the lease
- Income relating to variable lease payments not included in the measurement of the net investment
in the lease
- For operating leases, lease income, separately disclosing income relating to variable lease payments that do not depend on an index or a rate
- The nature of the lessor’s leasing activities
- How the lessor manages risk associated with any rights it retains in underlying assets such as buy back agreements, residual value guarantee or variable lease payments for use in excess of specified limits
Effective date and transition
An entity shall apply this standard for annual reporting periods beginning on or after 1st January 2019. Earlier application is permitted for entities that apply IFRS 15 – Revenue from Contracts with Customers, at or before the date of initial application of this standard.
If an entity applies this standard earlier it shall disclose the fact.
Decide whether to reassess the definition of a lease
Decide whether to apply the recognition exemptions for short-term leases and leases of low-value assets
Decide transition method
Decide whether to use portfolio discount rate and use of hindsight cumulative catch-up approach
Decide, on a lease-by-lease basis, how to measure rou asset – cumulative catch-up approach
Decide whether to apply transition relief for onerous leases and initial direct costs – cumulative catch-up approach
(This article is compiled by Mr. Bhartesh B. Poojari, Director in PKF L.L.C., the PKF member firm in the Sultanate of Oman)