IFRS 16 sets out the principles for the recognition, measurement, presentation and disclosure of leases. An entity shall apply IFRS 16 for annual reporting periods beginning on or after 1 January 2019.
This standard applies to all leases, except for:
Leases to explore for or use minerals, oil, natural gas and similar non regenerative resources;
Leases of biological assets;
Service concession arrangements within the scope of IFRIC 12 Service Concession Arrangements;
Licences of intellectual property granted by a lessor within the scope of IFRS 15 Revenue from Contracts with Customers; and
Rights held by a lessee under licensing agreements within the scope of IAS 38 Intangible Assets for such items as motion picture films, video recordings, plays, manuscripts, patents and copyrights.
At inception of a contract, an entity shall assess whether the contract is, or contains, a lease. A contract is, or contains, a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration.
IFRS 16 eliminates the classification of leases as either operating leases or finance leases for a lessee, instead all leases are treated in a similar way to finance leases applying IAS 17.
Accounting by Lessee
At the commencement date, a lessee shall recognise a right-of-use asset and a lease liability.
A lessee shall initially measure:
The right-of-use asset at cost; and
The lease liability at the present value of the lease payments that are not paid at that date. The lease payments shall be discounted using the interest rate implicit in the lease, if that rate can be readily determined. If that rate cannot be readily determined, the lessee shall use the lessee’s incremental borrowing rate.
A lessee shall subsequently measure:
The right-of-use asset applying a cost model (at cost less any accumulated depreciation and any accumulated impairment losses), unless it applies:
The fair value model in IAS 40 Investment Property to its investment property, the lessee shall also apply that fair value model to right of-use assets that meet the definition of investment property in IAS 40; or
The revaluation model in IAS 16, a lessee may elect to apply that revaluation model to all of the right-of-use assets that relate to that class of property, plant and equipment.
The lease liability by:
o Increasing the carrying amount to reflect interest on the lease liability; and
o Reducing the carrying amount to reflect the lease payments made.
In subsequent measurement, the lessee shall take into account any reassessment or lease modifications.
A lessee may elect not to apply the above requirements in the case of short-term leases; and leases for which the underlying asset is of low value.
Accounting by Lessor
A lessor shall classify each of its leases as either an operating lease or a finance lease. A lease is classified as a finance lease if it transfers substantially all the risks and rewards incidental to ownership of an underlying asset. A lease is classified as an operating lease if it does not transfer substantially all the risks and rewards incidental to ownership of an underlying asset.
In the case of finance leases, a lessor shall initially recognize assets held under a finance lease in its statement of financial position and present them as a receivable at an amount equal to the net investment in the lease. A lessor shall subsequently recognize finance income over the lease term, based on a pattern reflecting a constant periodic rate of return on the lessor’s net investment in the lease.
In the case of operating leases, a lessor shall recognise lease payments from operating leases as income on either a straight-line basis or another systematic basis. The lessor shall apply another systematic basis if that basis is more representative of the pattern in which benefit from the use of the underlying asset is diminished.
Accounting for sale and leaseback transactions
If an entity (the seller-lessee) transfers an asset to another entity (the buyer-lessor) and leases that asset back from the buyer-lessor, it shall apply the requirements for determining when a performance obligation is satisfied in IFRS 15 to determine whether the transfer of an asset is accounted for as a sale of that asset.
If the transfer of an asset by the seller-lessee satisfies the requirements of IFRS 15 to be accounted for as a sale of the asset:
The seller-lessee shall measure the right-of-use asset arising from the leaseback at the proportion of the previous carrying amount of the asset that relates to the right of use retained by the seller-lessee. Accordingly, the seller-lessee shall recognise only the amount of any gain or loss that relates to the rights transferred to the buyer-lessor.
The buyer-lessor shall account for the purchase of the asset applying applicable Standards, and for the lease applying the lessor accounting requirements in accordance to IFRS 16.
If the transfer of an asset by the seller-lessee does not satisfy the requirements of IFRS 15 to be accounted for as a sale of the asset:
The seller-lessee shall continue to recognise the transferred asset and shall recognise a financial liability equal to the transfer proceeds. It shall account for the financial liability applying IFRS 9.
The buyer-lessor shall not recognise the transferred asset and shall recognise a financial asset equal to the transfer proceeds. It shall account for the financial asset applying IFRS 9.