How to Apply IFRS 16: Leases in Your BusinessAccountingAccounting & Finance by Arbab Ali - April 28, 2023April 28, 20230 How to Apply IFRS 16: Leases in Your BusinessIFRS 16 is the new accounting standard for leases that came into effect on 1 January 2019. It replaces the previous standard, IAS 17, and introduces significant changes for lessees and lessors. In this article, we will focus on how to apply IFRS 16 for lessees.What is a lease?A lease is a contract that gives a lessee the right to use an asset (the underlying asset) . Under IFRS 16, a lessee should identify whether an arrangement contains a lease by assessing whether it has the right to control the use of an identified asset throughout the lease term. This may require judgment and analysis of the terms and conditions of the contract and the facts and circumstances of the transaction.How to recognize a lease?Under IFRS 16, a lessee should recognize a right-of-use asset and a lease liability for all leases, except for short-term leases (less than 12 months) and low-value leases (such as laptops and office furniture). A right-of-use asset represents the lessee’s right to use the underlying asset, and a lease liability represents the lessee’s obligation to make lease payments.The right-of-use asset is initially measured at cost, which includes the amount of the initial measurement of the lease liability, any lease payments made at or before the commencement date, any initial direct costs incurred by the lessee, and an estimate of costs to dismantle and remove the underlying asset or to restore the site on which it is located. The right-of-use asset is subsequently measured at cost less accumulated depreciation and impairment losses, adjusted for any remeasurement of the lease liability.The lease liability is initially measured at the present value of the future lease payments that are not paid at the commencement date, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, the lessee’s incremental borrowing rate. The lease liability is subsequently measured by increasing it to reflect interest on the lease liability, reducing it to reflect lease payments made, and remeasuring it to reflect any reassessment or modification of the lease.How to present and disclose a lease?Under IFRS 16, a lessee should present right-of-use assets separately from other assets in the statement of financial position or disclose them in the notes. Similarly, a lessee should present lease liabilities separately from other liabilities or disclose them in the notes.A lessee should also disclose qualitative and quantitative information about its leases in order to provide a basis for users of financial statements to assess the effect of leases on its financial position, performance and cash flows. The disclosure requirements include information about:– The nature of its leases and significant judgments made in applying IFRS 16; – The amount, timing and uncertainty of cash flows arising from leases; – The amount of expenses recognized for variable lease payments, short-term leases, low-value leases and leases not yet commenced; – The amount of income from subleasing right-of-use assets; – The amount of gains or losses from sale and leaseback transactions; and – Any other relevant information that is not otherwise readily apparent from other information provided.ConclusionIFRS 16 is a major change in lease accounting that affects many businesses across various industries. It requires lessees to recognize assets and liabilities for most leases on their balance sheets, which may have significant implications for their financial ratios, debt covenants, tax positions and performance indicators. Lessees should therefore understand how to apply IFRS 16 correctly and consistently, and communicate its impact clearly to their stakeholders.Sources: (1) IFRS 16 — Leases – IAS Plus. https://www.iasplus.com/en/standards/ifrs/ifrs-16. (2) IFRS – IFRS 16 Leases. https://www.ifrs.org/issued-standards/list-of-standards/ifrs-16-leases/. (3) IFRS 16 – Leases handbook – KPMG Global. https://kpmg.com/xx/en/home/services/audit/international-financial-reporting-standards/leases/lease-accounting-handbook-ifrs16-231018.html. Share on TwitterTweet Share on Pinterest Share Share on LinkedIn Share Share on Digg Share