IFRS 16 Leases summary - applies in 2024

Summary

This video provides an overview of IFRS 16, the international standard for lease accounting, effective from January 2019. It explains the main principles for recognizing, measuring, and disclosing leases, including the elimination of the finance and operating lease distinction for lessees. Optional exemptions for short-term and low-value assets are discussed, along with the accounting treatment for both lessees and lessors, as well as the impact of sale and leaseback transactions. The video is an educational resource by CPDbox.com, a platform for professional development in financial reporting.

Takeaways

• 📅 IFRS 16 has been applicable for accounting periods starting on or after January 1, 2019, replacing IAS 17.
• 🔍 The standard includes amendments related to COVID-19 concessions and IBOR reform, but these do not affect the main principles.
• 📝 The objective of IFRS 16 is to establish principles for recognizing, measuring, presenting, and disclosing leases.
• 🚫 IFRS 16 has mandatory exceptions for certain lease arrangements, with different accounting standards applying to these.
• 🛑 There are two optional exemptions: leases with a term of 12 months or less without a purchase option, and leases for low-value assets when new.
• 🔑 A contract contains a lease if it conveys the right to control the use of an identified asset for a specified period in exchange for consideration.
• 🏢 For lessees, all leases are accounted for similarly under IFRS 16, with the recognition of both the right-of-use asset and the lease liability.
• 💰 The right-of-use asset is measured at the commencement of the lease and includes prepayments, which form part of the asset.
• 📉 Lessees must depreciate the right-of-use asset and recognize interest on the lease liability using a constant periodic rate.
• 🔄 Lessors classify leases as finance or operating based on the transfer of ownership risks and rewards, affecting subsequent accounting treatment.
• 💼 For finance leases, lessors recognize lease receivables and account for them by splitting payments between reduction of receivables and finance income.
• 📈 For operating leases, lessors recognize lease payments as revenue on a straight-line basis or another systematic basis.
• 🔄 Asymmetric accounting under IFRS 16 means both lessor and lessee may recognize assets in their financial statements.

Q & A

What is the main purpose of IFRS 16?

The main purpose of IFRS 16 is to specify the principles for the recognition, measurement, presentation, and disclosure of leases.

When did IFRS 16 become applicable?

IFRS 16 became applicable for all periods starting on or after January 1, 2019.

What are the mandatory exceptions to IFRS 16?

The mandatory exceptions to IFRS 16 include various types of arrangements where different standards or rules apply, such as service concessions and license agreements.

What are the two optional exemptions provided by IFRS 16?

The two optional exemptions are for leases with a lease term of 12 months or less with no purchase option, and for leases of underlying assets that have a low value when new, such as personal computers.

How does IFRS 16 define a lease for accounting purposes?

A lease is defined by IFRS 16 as a contract that conveys the right to control the use of an identified asset for a specified period of time in exchange for consideration.

What is the significant change in lease accounting for lessees under IFRS 16 compared to IAS 17?

The significant change is that under IFRS 16, lessees no longer classify leases into finance and operating; instead, they recognize all leases in the same way, except for the two optional exemptions.

What is recognized by the lessee at the commencement of the lease under IFRS 16?

At the commencement of the lease, the lessee recognizes both the right-of-use asset and the lease liability.

How is the lease liability measured under IFRS 16?

The lease liability is measured as the present value of all lease payments not paid at the commencement date, using the interest rate implicit in the lease or the lessee's incremental borrowing rate.

What is the accounting treatment for the right-of-use asset by the lessee?

The lessee accounts for the right-of-use asset by depreciating it over its useful life and performing impairment testing under IAS 36.

How does a lessor classify a lease under IFRS 16?

A lessor classifies a lease as a finance lease if the transfer of substantially all the risks and rewards of ownership of the asset is to the lessee; otherwise, it is an operating lease.

What is the accounting treatment for a finance lease by the lessor under IFRS 16?

For a finance lease, the lessor recognizes a lease receivable at the commencement of the lease and subsequently splits the lease payments received between the reduction of the finance lease receivable and finance income.

How are lease payments from an operating lease recognized by the lessor?

Lease payments from an operating lease are recognized as revenue in the profit or loss, typically on a straight-line basis or some other systematic basis.

What is the impact of a sale and leaseback transaction under IFRS 16?

The accounting treatment of a sale and leaseback transaction depends on whether the transfer of the asset is a sale under IFRS 15. If it is a sale, the seller recognizes a right-of-use asset and a gain or loss; if not, the seller continues to recognize the asset and the payment is accounted for as a financial liability.