• IFRS 16 Leases
Technical update:

IFRS 16 Leases

15 August 2017

IFRS 16 brings major changes for lessees and will have a significant effect on any entity that has entered into material amounts of what are currently accounted for as operating leases. In contrast, for lessors, the accounting requirements have largely been carried forward unchanged from IAS 17.

The guidance in IFRS 16 is aligned with the new revenue recognition guidance in IFRS 15.  This is relevant for sale and leaseback transactions, where it is considerably less likely that a sale and leaseback will be recorded, with the asset being retained on balance sheet and the proceeds of the ‘sale’ being recorded as a loan.  Entities that have entered into sale and leaseback transactions may wish to consider adopting IFRS 16 early, to align this with the earlier effective date of IFRS 15.

There are also practical expedients relating to the measurement of lease liabilities and leased assets that will be reported on transition.  However, care is needed because decisions taken about how an entity transitions to IFRS 16 will affect future financial statements for a period of years.  For example, right of use assets can be measured on the basis of data available as at the date of initial application of IFRS 16, which may be more straightforward than retrospective restatement. However, this is likely to result in assets being measured at higher amounts than they would using historical data, which will result in higher future depreciation charges.

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