IFRS 16 - Leases

IFRS 16 – Leases

IFRS 16 – Leases


International financial reporting standard (IFRS) 16 – Leases provides a comprehensive framework that aims at the:

  • Recognition,
  • Measurement,
  • Presentation and
  • Disclosure of LEASES.

The standard aims at a single lease accounting model that has the basic recognition requirement for all leases regarding assets and liabilities for every lease that has a term of more than 12 months. The exception to this recognition is given to low value leases.


The main objective of the standard is to provide guidelines to truthfully report lease transaction information and evaluate the uncertainty, timing, and amount of lease cash flows. This resulted in the recognition of all leases in the statement of financial position superseding the previous practice where one could hide certain lease liabilities in the notes to the financial statements rather than the face.

Effective Date and Supersession

The lease standard became applicable on all entities with reporting period starting on or after 1st January 2019. From this date onward, IFRS 16 superseded the previous lease standard IAS 17 – Leases. The most significant changes introduced through IFRS 16 were:

  • Lease accounting in financial statements of lessee changed abandoning the classification as finance or operating lease. Instead, all leases were now to be accounted for in the same way,
  • The new definition of lease had the impact of recognising some contracts as ‘lease contracts’ for previously treated ‘service contracts’.


The standard applies to all lease contracts with the exception of the following:

  • Lessor granted license of intellectual property – under IFRS 15
  • Biological assets lease – under IAS 41
  • Lease to explore non-regenerative resources such as minerals, oils, and natural gas
  • Arrangements under service concession – under IFRIC 12
  • Rights under licensing arrangements held by lessee – under IAS 38

Apart from above, a lessee is allowed to choose to apply the standard requirements of IFRS 16 to intangible assets leases, other than the ones mentioned above.

Important Definitions

  • Lease: a contract or part thereof, giving right to use an underlying asset, in exchange for a consideration. The contract is for a period of time with sometimes renewal terms.
  • Lease Term: the right possessed by a lessee to use an underlying asset for a period that is non-cancellable, together with both of the following:
    1. If lessee is reasonably certain to exercise the option – lease extension period
    2. If lessee is reasonably certain not to exercise the option – lease termination period
  • Finance Lease: a lease that:
    1. Results in the transfer of substantially all the rewards and risks relating to the assets incidental ownership
    2. The title of the lease may or may not be transferred.
  • Operating Lease: every lease other than a finance lease.
  • Lessee’s Incremental Borrowing Rate: an interest rate that would have to be paid by a lessee for similar term borrowing with similar security, with the necessary funds required to obtain a similar value asset, in a similar economic environment to the right of use of the asset.

Accounting Requirements for Lease under IFRS 16

Lessee Accounting

  1. Initial Recognition

At initial recognition, on the commencement date, a lessee recognizes and measures the following:

Lease Liability Right-Of-Use Asset
Ø  A lease liability is recognized for the unpaid portion of payments,
Ø  Interest rate implicit in the lease is used for discounting or incremental rate of borrowing if the former cannot be readily determinable,
Ø  Lease liability comprises of the following:
· Variable lease payments (dependent on rate or index)
· Fixed payments net of lease incentive receivables,
· Guarantees of residual values,
· Penalties of lease termination (if that option is considered for lease term settlement)
· Exercise price of bargain purchase option (if reasonably certain)
Ø Right of use asset is recognized at cost,
Ø Right of use asset comprises of:
· Initial direct costs incurred,
· Amount of recognized lease liability,
· The lease payments made before or at the commencement date net of lease incentives,
· An estimated amount of present value of future dismantling cost.
Journal entry Journal entry
· No advance payment:
Dr. Right of use asset
Cr. Lease liability
· Advance payment made:
Dr. lease liability
Cr. Lease payment / Cash
· No advance payment:
Dr. Right of use asset
Cr. Lease liability
· Advance payment made:
No entry required.

For all lease contracts except for the following optional exemptions:

  • Short term leases:
  • Lease term of 12 months or less,
  • The election is by class of asset.
  • Low value underlying asset:
  • Low value items such as computers, telephones, old furniture etc.
  • Election is made on lease by lease basis.
  1. Subsequent Measurement

The following subsequent requirements are applied to the initially recognized lease liability and right of use asset:

Lease Liability Right-Of-Use Asset
Re-measurement of lease liability is made by lessee as under:
a) Carrying amount is reduced by the amount of lease payments made,
b) Increase carrying amount by the interest on the lease liability,
c) Carrying amount re-measurement to reflect modifications, reassessments, or in-substance fixed lease payment revisions.For changes in non-cancellable period of the lease, the lease term is updated, when:
a) An existing option which was not previously included in lease term determination, is exercised by the lessee,
b) An option which was previously included in lease term determination, is not exercised by the lessee,
c) Occurrence of an event that obliges the lessee to exercise an existing option which was not previously included in lease term determination,
d) Occurrence of an event after which the lessee is contractually prohibited to exercise an option which was previously included in lease term determination.Recognition of variable lease payment in profit and loss, that were not included in the initial lease measurement but are now payable triggered through an event or condition.
Three options are available:
1. Cost Model (IAS 16)
Ø  For recording of depreciation, IAS 16 PPE is used,
Ø  Depreciation period is either:
· if lease transfers the ownership – useful life of the asset,
· no ownership transfer – earlier of lease term or useful life
Ø  Based on re-measurement as a result of lease liability reassessment, adjustment of carry value,
Ø  For the measurement of impairment, application of IAS 36 Impairment of Assets.2. Revaluation Model (IAS 16)
Ø  Lessee has an option to elect revaluation model to a class of right of use asset if it applies the same to the same class of asset.3. Investment Property (IAS 40)
Ø  Upon application of fair value model by lessee to its investment properties, the lessee will also be then required to apply the fair value model to all the right of use asset that falls under the IAS 40 Investment Property definition.
Journal entry Journal entry
· When lease payments are made
Dr. Lease Liability
Cr. Cash
· Recording Finance Interest
Dr. Finance Interest (P&L)
Cr. Lease Liability
· Recording Depreciation
Dr. Depreciation
Cr. Accumulated Depreciation
(revaluation and investment property entries in accordance with those standards)

Financial Statement Presentation

Statement of Financial Position

  • Right of use asset is recorded as under:
  • Right of use asset is presented separately from all other assets, or
  • Right of use asset is included within the same line item as that of the underlying asset,
  • Right of use asset classified as investment property are presented as investment property.
  • Lease liabilities are either:
  • Separately presented from all other liabilities, or
  • The line item is disclosed in which the lease liabilities are included.

Statement of Profit and loss

  • Finance cost – it is the interest expense on the lease liability,
  • Depreciation – relating to the right of use asset.

Statement of Cash Flow

  • Finance activities – include principal payments on the lease liability,
  • The guidance of IAS 7 Statement of Cash Flow is used to account for payments of interest,
  • Operating activities – will include the following that are not included in the measurement of lease liability:
  • Variable lease payments,
  • Low value lease,
  • Short term lease.

Lessor Accounting

Classification Criteria

A lessor needs to classify lease contracts as either:

  1. Finance Lease or
  2. Operating lease

IFRS 16 presents different requirements and accounting treatments for both types of classification.

Any of the following indicators can classify a lease as Finance Lease:

  1. The term of the lease is for major part of the asset’s economic life;
  2. By the end of the lease term, the ownership of the underlying asset is transferred to the lessee;
  • The lease possesses a bargain purchase option;
  1. The lease payment’s present value is substantially equal to the fair value of the asset;
  2. Only the lessee is able to use the underlying asset without modification due to its specialized nature.

The following additional indicators may also lead to finance lease classification:

  1. The lessee has the option to utilize a secondary lease period at a rent that is substantially lower than the market;
  • Residual fair value fluctuation gains and losses accrue to the lessee;
  • The lessee is required to bear the losses accruing to the lessor, as a result from cancellation of lease by the lessee.

Accounting Treatment

Finance Lease Operating Lease
 Ø  De-recognition of the leased asset,
Ø  Recognition of gain and loss on de-recognition,
Ø  The net investment in lease is recognised as a receivable by the lessor,
Ø  A constant periodic rate of return reflecting the net investment in lease is used to form a pattern to recognise finance income.
 Ø  In its statement of financial position, the lessor retains the asset leased,
Ø  An executory basis is used to account for the leased contract,
Ø  Over the lease term, the lease income is recognized on a straight line basis.

Transition by Intermediate Lessor

On adaptation of IFRS 16, apart from intermediate lessors, lessors do not need to record transitional adjustments, this is because there is almost no change of the lessor guidance from IAS 17.

An intermediate lessor is required to do the following:

  1. On the date of initial application of IFRS 16, reassess all sub-leases that were classified under IAS 17 as operating leases in order to determine whether the sub-leases need to be classified as finance lease or operating lease under the new standard. This assessment is required to be made at the transition time, based on the contractual conditions and terms remaining for the head lease and sub-lease,
  2. If the lease, as a result of re-assessment is classified as finance lease, the sub-lease is required to be accounted for as a new finance lease that has been entered into at the initial application date of IFRS 16.

Other Useful implementation guidance in relation to IFRS 16

  • Modification

A lessee is required to account for lease modification as a separate lease if:

  1. The scope of the lease is increased by modification by addition of one or more underlying assets right to use and,
  2. There is an increase in the consideration for the lease by an amount that is commensurate with the stand-alone price for the scope increase (including appropriate adjustments reflecting contract circumstances)
  • Sale and Lease Back Transactions

IFRS 15 guidance is used to determine whether the transaction is a sale or not.

  1. Lessee Accounting
Transfer is a Sale Transfer is not a Sale
 Ø  The right of use asset is proportionally recorded to the previous carrying amount relating to the retained portion of right to use,
Ø  Gains and losses are only for the amount of transferred rights,
Ø  Adjustments are required if:
– Sale is not at fair value or
– Lease payments are not at the rates of market
 Ø  Equal to the proceeds transferred, a financial liability is recognised,
Ø  IFRS 9 is used to account for the financial liability,
Ø  The asset will be continued to be recognised.
  1. Lessor Accounting
Transfer is a Sale Transfer is not a Sale
Ø  Applicable IFRS are used to account for asset purchases,
Ø  The lease is accounted for under the IFRS 16 lessor accounting.
Ø  The transferred asset is not recognized, and a financial asset is recognised equal to the transferred proceeds,
Ø  IFRS 9 is used to account for the financial asset.
  • Covid-19 Related Rent Concessions

As a direct consequence of COVID-19, on 28th May 2020, the IASB issued amendments to IFRS 16, providing relief for lessees, to account for the granted rent concessions.

On or after 1st June 2020, these amendments become effective with the permission of earlier application.

Mostly, the rent concessions provided, fall under the definition of lease modification, requiring re-measurement of the lessee’s lease liability based on the revised new consideration and the revised discount rate.

The following amendments have been introduced in IFRS 16:

  1. Provide exemption to lessees from the determination requirement of considering whether the rent concession granted as a result of COVID-19 are lease modification,
  2. Requiring every lessee applying the COVID-19 related rent concession exemption to apply them as lease modifications.

ALL of the following criteria needs to be met for the lessee to apply the above relief:

  • The occurrence of rent concession is a direct consequence of the COVID-19,
  • The changed amount of lease payments resulting revised lease consideration, that is less than or substantially the same as the consideration immediately before the change,
  • The lease payment reduction only affects the payments that originally were due before or on 30th June 2021.

Practical Expedient Requirements of the New Amendment:

  • The change in lease payments is not accounted for as lease modification by the lessee,
  • Not accounting for the change as lease modification will, in many cases, result to be treated as variable payments,
  • If and when accounted for as variable lease payments, profit and loss is used to account for the concession in the period in which the triggered event occurs.

Disclosure Requirements

  1. Lessee Related
  • Qualitative information relating to the leasing activities of lessee,
  • Rights and obligations arising as a result of major contracts of lease,
  • Qualitative disclosures on:
  • commitments under lease,
  • variable lease payments,
  • extension options,
  • termination options,
  • guarantee residual values,
  • Use of low value or short term lease.
  1. Lessor Related

IAS 17 disclosures are enhanced as under:

  • Quantitative and qualitative disclosures about leasing activities,
  • Nature of the leasing activities of the lessor,
  • Information on management of risk associated with the asset’s rights retained,
  • Lease payment receivable maturity rights,
  • Reconciliation of net investment in lease to the discounted lease payment receivables.
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