IFRS 16 Leases

Overview
IFRS 16 specifies how an IFRS reporter will recognise, measure, present
and disclose leases. The standard provides a single lessee accounting
model, requiring lessees to recognise assets and li
a
bil
i
ties for all leases
unless the lease term is 12 months or less or the un
der
ly
ing asset has a
low value. Lessors continue to classify leases as operating or finance,
with IFRS 16s approach to lessor accounting sub
stan
tially unchanged
from its pre
de
ces
sor, IAS 17.
IFRS 16 was issued in January 2016 and applies to annual reporting
periods beginning on or after 1 January 2019.

History of IFRS 16

Date
De
vel
op
ment
July 2006
Added to the IASB's agenda
19March2009 Dis
cus
sion Paper DP/2009/1
Leases: Preliminary Views published
17August2010Exposure Draft ED/2010/9 Leases
published
21July2011 IASB/FASB announce intention to
re-expose proposals
16 May 2013 Exposure Draft ED/2013/6 Leases
published
13 January
IFRS 16 Leases published
2016

Related In
ter
pre
ta
tions
None

Comments
Comment deadline 17 July 2009
Comment deadline 15 December
2010
ED orig
i
nally expected in first half of
2012
Comment deadline 13 September
2013
Effective for annual periods
beginning on or after 1 January 2019

Amend
ments under con
sid
er
a
tion by the IASB
None

Su
per
seded Standards
IFRS 16 replaces the following standards and in
ter
pre
ta
tions:
IAS 17 Leases
IFRIC 4 Determining whether an Arrangement contains a Lease
SIC-15Operating Leases - Incentives
SIC-27 Evaluating the Substance of Transactions Involving the Legal
Form of a Lease

Guides
Leases A guide to IFRS 16

Summary of IFRS 16
Objective
IFRS 16 es
tab
lishes prin
ci
ples for the recog
ni
tion, mea
sure
ment, pre
sen
ta
tion and dis
clo
sure of leases, with the objective of ensuring that
lessees and lessors provide relevant in
for
ma
tion that faith
fully rep
re
sents those trans
ac
tions. [IFRS 16:1]
Scope
IFRS 16 Leases applies to all leases, including subleases, except for:
[IFRS 16:3]
leases to explore for or use minerals, oil, natural gas and similar
non-re
gen
er
a
tive resources;
leases of bi
o
log
i
cal assets held by a lessee (see IAS 41 Agriculture);
service con
ces
sion arrange
ments (see IFRIC 12 Service Concession Arrangements);

licences of in
tel
lec
tual property granted by a lessor (see IFRS 15
Revenue from Contracts with Customers); and
rights held by a lessee under licensing agree
ments for items such
as films, videos, plays, man
u
scripts, patents and copy
rights within
the scope of IAS 38 Intangible Assets
A lessee can elect to apply IFRS 16 to leases of in
tan
gi
ble assets, other
than those items listed above. [IFRS 16:4]
Recog
ni
tion ex
emp
tions
Instead of applying the recog
ni
tion re
quire
ments of IFRS 16 described
below, a lessee may elect to account for lease payments as an expense
on a straight-line basis over the lease term or another sys
tem
atic basis
for the following two types of leases:
i) leases with a lease term of 12 months or less and con
tain
ing no
purchase options this election is made by class of un
der
ly
ing asset;
and
ii) leases where the un
der
ly
ing asset has a low value when new (such as
personal computers or small items of office furniture) this election can
be made on a lease-by-lease basis.
[IFRS 16:5, 6 & 8]
Iden
ti
fy
ing a lease
A contract is, or contains, a lease if it conveys the right to control the use
of an iden
ti
fied asset for a period of time in exchange for con
sid
er
a
tion.
[IFRS 16:9]
Control is conveyed where the customer has both the right to direct the
iden
ti
fied assets use and to obtain sub
stan
tially all the economic
benefits from that use. [IFRS 16:B9]
An asset is typically iden
ti
fied by being ex
plic
itly specified in a contract,
but an asset can also be iden
ti
fied by being im
plic
itly specified at the
time it is made available for use by the customer.

However, where a supplier has a sub

stan
tive right of sub
sti
tu
tion
through
out the period of use, a customer does not have a right to use an
iden
ti
fied asset. A suppliers right of sub
sti
tu
tion is only con
sid
ered sub
stan
tive if the supplier has both the practical ability to sub
sti
tute al
ter
na
tive assets through
out the period of use and they would eco
nom
i
cally
benefit from sub
sti
tu
tion. [IFRS 16:B13-14]
A capacity portion of an asset is still an iden
ti
fied asset if it is phys
i
cally
distinct (e.g. a floor of a building). A capacity or other portion of an asset
that is not phys
i
cally distinct (e.g. a capacity portion of a fibre optic
cable) is not an iden
ti
fied asset, unless it rep
re
sents sub
stan
tially all the
capacity such that the customer obtains sub
stan
tially all the economic
benefits from using the asset. [IFRS 16:B20]
Sep
a
rat
ing com
po
nents of a contract
For a contract that contains a lease component and ad
di
tional lease and
non-lease com
po
nents, such as the lease of an asset and the provision
of a main
te
nance service, lessees shall allocate the con
sid
er
a
tion
payable on the basis of the relative stand-alone prices, which shall be
estimated if ob
serv
able prices are not readily available.
As a practical expedient, a lessee may elect, by class of un
der
ly
ing asset,
not to separate non-lease com
po
nents from lease com
po
nents and
instead account for all com
po
nents as a lease. [IFRS 16:13-15]
Lessors shall allocate con
sid
er
a
tion in ac
cor
dance with IFRS 15 Revenue
from Contracts with Customers.
Key de
f
i
n
i
tions
[IFRS 16: Appendix A]
Interest rate implicit in the lease
The interest rate that yields a present value of (a) the lease payments and
(b) the un
guar
an
teed residual value equal to the sum of (i) the fair value
of the un
der
ly
ing asset and (ii) any initial direct costs of the lessor.

Lease term
The non-can
cellable period for which a lessee has the right to use an un
der
ly
ing asset, plus:
a) periods covered by an extension option if exercise of that option by the
lessee is rea
son
ably certain; and
b) periods covered by a ter
mi
na
tion option if the lessee is rea
son
ably
certain not to exercise that option
Lessees incremental borrowing rate
The rate of interest that a lessee would have to pay to borrow over a
similar term, and with a similar security, the funds necessary to obtain an
asset of a similar value to the right-of-use asset in a similar economic en
vi
ron
ment.
Accounting by lessees
Upon lease com
mence
ment a lessee recog
nises a right-of-use asset and
a lease liability. [IFRS 16:22]
The right-of-use asset is initially measured at the amount of the lease
liability plus any initial direct costs incurred by the lessee. Ad
just
ments
may also be required for lease in
cen
tives, payments at or prior to com
mence
ment and restora
tion oblig
a
tions or similar. [IFRS 16:24]
After lease com
mence
ment, a lessee shall measure the right-of-use asset
using a cost model, unless: [IFRS 16:29, 34, 35]
i) the right-of-use asset is an in
vest
ment property and the lessee fair
values its in
vest
ment property under IAS 40; or
ii) the right-of-use asset relates to a class of PPE to which the lessee
applies IAS 16s reval
u
a
tion model, in which case all right-of-use assets
relating to that class of PPE can be revalued.

Under the cost model a right-of-use asset is measured at cost less ac

cu
mu
lated de
pre
ci
a
tion and ac
cu
mu
lated im
pair
ment. [IFRS 16:30(a)]
The lease liability is initially measured at the present value of the lease
payments payable over the lease term, dis
counted at the rate implicit in
the lease if that can be readily de
ter
mined. If that rate cannot be readily
de
ter
mined, the lessee shall use their in
cre
men
tal borrowing rate. [IFRS
16:26]
Variable lease payments that depend on an index or a rate are included in
the initial mea
sure
ment of the lease liability and are initially measured
using the index or rate as at the com
mence
ment date. Amounts expected
to be payable by the lessee under residual value guar
an
tees are also
included. [IFRS 16:27(b),(c)]
Variable lease payments that are not included in the mea
sure
ment of the
lease liability are recog
nised in profit or loss in the period in which the
event or condition that triggers payment occurs, unless the costs are
included in the carrying amount of another asset under another
Standard. [IFRS 16:38(b)
The lease liability is sub
se
quently re
mea
sured to reflect changes in:
[IFRS 16:36]
the lease term (using a revised discount rate);
the as
sess
ment of a purchase option (using a revised discount
rate);
the amounts expected to be payable under residual value guar
an
tees (using an unchanged discount rate); or
future lease payments resulting from a change in an index or a
rate used to determine those payments (using an unchanged
discount rate).
The re
mea
sure
ments are treated as ad
just
ments to the right-of-use
asset. [IFRS 16:39]

Lease mod
i
fi
ca
tions may also prompt re
mea
sure
ment of the lease
liability unless they are to be treated as separate leases. [IFRS 16:36(c)]
Accounting by lessors
Lessors shall classify each lease as an operating lease or a finance
lease. [IFRS 16:61]
A lease is clas
si
fied as a finance lease if it transfers sub
stan
tially all the
risks and rewards in
ci
den
tal to ownership of an un
der
ly
ing asset.
Otherwise a lease is clas
si
fied as an operating lease. [IFRS 16:62]
Examples of sit
u
a
tions that in
di
vid
u
ally or in com
bi
na
tion would normally
lead to a lease being clas
si
fied as a finance lease are: [IFRS 16:63]
the lease transfers ownership of the asset to the lessee by the end
of the lease term
the lessee has the option to purchase the asset at a price which is
expected to be suf
fi
ciently lower than fair value at the date the
option becomes ex
er
cis
able that, at the inception of the lease, it is
rea
son
ably certain that the option will be exercised
the lease term is for the major part of the economic life of the
asset, even if title is not trans
ferred
at the inception of the lease, the present value of the minimum
lease payments amounts to at least sub
stan
tially all of the fair
value of the leased asset
the leased assets are of a spe
cialised nature such that only the
lessee can use them without major mod
i
fi
ca
tions being made
Upon lease com
mence
ment, a lessor shall recognise assets held under a
finance lease as a re
ceiv
able at an amount equal to the net in
vest
ment in
the lease. [IFRS 16:67]
A lessor recog
nises finance income over the lease term of a finance
lease, based on a pattern re
flect
ing a constant periodic rate of return on
the net in
vest
ment. [IFRS 16:75]

At the com
mence
ment date, a man
u
fac
turer or dealer lessor recog
nises
selling profit or loss in ac
cor
dance with its policy for outright sales to
which IFRS 15 applies. [IFRS 16:71c)]
A lessor recog
nises operating lease payments as income on a straightline basis or, if more rep
re
sen
ta
tive of the pattern in which benefit from
use of the un
der
ly
ing asset is di
min
ished, another sys
tem
atic basis.
[IFRS 16:81]
Sale and leaseback trans
ac
tions
To determine whether the transfer of an asset is accounted for as a sale
an entity applies the re
quire
ments of IFRS 15 for de
ter
min
ing when a per
for
mance oblig
a
tion is satisfied. [IFRS 16:99]
If an asset transfer satisfies IFRS 15s re
quire
ments to be accounted for
as a sale the seller measures the right-of-use asset at the pro
por
tion of
the previous carrying amount that relates to the right of use retained. Ac
cord
ingly, the seller only recog
nises the amount of gain or loss that
relates to the rights trans
ferred to the buyer. [IFRS 16:100a)]
If the fair value of the sale con
sid
er
a
tion does not equal the assets fair
value, or if the lease payments are not market rates, the sales proceeds
are adjusted to fair value, either by accounting for pre
pay
ments or ad
di
tional financing. [IFRS 16:101]
Dis
clo
sure
The objective of IFRS 16s dis
clo
sures is for in
for
ma
tion to be provided in
the notes that, together with in
for
ma
tion provided in the statement of
financial position, statement of profit or loss and statement of cash
flows, gives a basis for users to assess the effect that leases have. Para
graphs 52 to 60 of IFRS 16 set out detailed re
quire
ments for lessees to
meet this objective and para
graphs 90 to 97 set out the detailed re
quire
ments for lessors. [IFRS 16:51, 89]
Effective date and tran
si
tion

An entity applies IFRS 16 for annual reporting periods beginning on or

after 1 January 2019. Earlier ap
pli
ca
tion is permitted if IFRS 15 Revenue
from Contracts with Customers has also been applied. [IFRS 16:C1]
As a practical expedient, an entity is not required to reassess whether a
contract is, or contains, a lease at the date of initial ap
pli
ca
tion. [IFRS
16:C3]
A lessee shall either apply apply IFRS 16 with full ret
ro
spec
tive effect or
al
ter
na
tively not restate com
par
a
tive in
for
ma
tion but recognise the cu
mu
la
tive effect of initially applying IFRS 16 as an ad
just
ment to opening
equity at the date of initial ap
pli
ca
tion. [IFRS 16:C5, C7]
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