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 liabilities for all leases unless the lease term is 12 months or less or the underlying asset has a low value. Lessors continue to classify leases as operating or finance, with IFRS 16’s approach to lessor accounting substantially unchanged from its predecessor, IAS 17.
IFRS 16 was issued in January 2016 and applies to annual reporting periods beginning on or after 1 January 2019.
| Date | Development | Comments |
|---|---|---|
| July 2006 | Added to the IASB's agenda | |
| 19 March 2009 | Discussion Paper DP/2009/1 Leases: Preliminary Views published | Comment deadline 17 July 2009 |
| 17 August 2010 | Exposure Draft ED/2010/9 Leases published | Comment deadline 15 December 2010 |
| 21 July 2011 | IASB/FASB announce intention to re-expose proposals | ED originally expected in first half of 2012 |
| 16 May 2013 | Exposure Draft ED/2013/6 Leases published | Comment deadline 13 September 2013 |
| 13 January 2016 | IFRS 16 Leases published | Effective for annual periods beginning on or after 1 January 2019 |
| 14 May 2020 | Amended by Annual Improvements to IFRS Standards 2018–2020 (lease incentives illustrative example). Click for more information | Effective for annual periods beginning on or after 1 January 2022 |
| 28 May 2020 | Amended by Covid-19-Related Rent Concessions (Amendment to IFRS 16) | Effective for annual periods beginning on or after 1 June 2020 |
| 27 August 2020 | Amended by Interest Rate Benchmark Reform — Phase 2 (Amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16) | Effective for annual periods beginning on or after 1 January 2021 |
| 31 March 2021 | Amended by Covid-19-Related Rent Concessions beyond 30 June 2021 (Amendment to IFRS 16) | Effective for annual periods beginning on or after 1 April 2021 |
| 22 September 2022 | Amended by Lease Liability in a Sale and Leaseback (Amendments to IFRS 16) | Effective for annual periods beginning on or after 1 January 2022 |
IFRS 16 replaces the following standards and interpretations:
IFRS 16 establishes principles for the recognition, measurement, presentation and disclosure of leases, with the objective of ensuring that lessees and lessors provide relevant information that faithfully represents those transactions. [IFRS 16:1]
IFRS 16 Leases applies to all leases, including subleases, except for: [IFRS 16:3]
A lessee can elect to apply IFRS 16 to leases of intangible assets, other than those items listed above. [IFRS 16:4]
Instead of applying the recognition requirements 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 systematic basis for the following two types of leases:
i) leases with a lease term of 12 months or less and containing no purchase options – this election is made by class of underlying asset; and
ii) leases where the underlying 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.
A contract is, or contains, a lease if it conveys the right to control the use of an identified asset for a period of time in exchange for consideration. [IFRS 16:9]
Control is conveyed where the customer has both the right to direct the identified asset’s use and to obtain substantially all the economic benefits from that use. [IFRS 16:B9]
An asset is typically identified by being explicitly specified in a contract, but an asset can also be identified by being implicitly specified at the time it is made available for use by the customer.
However, where a supplier has a substantive right of substitution throughout the period of use, a customer does not have a right to use an identified asset. A supplier’s right of substitution is only considered substantive if the supplier has both the practical ability to substitute alternative assets throughout the period of use and they would economically benefit from substitution. [IFRS 16:B13-14]
A capacity portion of an asset is still an identified asset if it is physically distinct (e.g. a floor of a building). A capacity or other portion of an asset that is not physically distinct (e.g. a capacity portion of a fibre optic cable) is not an identified asset, unless it represents substantially all the capacity such that the customer obtains substantially all the economic benefits from using the asset. [IFRS 16:B20]
For a contract that contains a lease component and additional lease and non-lease components, such as the lease of an asset and the provision of a maintenance service, lessees shall allocate the consideration payable on the basis of the relative stand-alone prices, which shall be estimated if observable prices are not readily available.
As a practical expedient, a lessee may elect, by class of underlying asset, not to separate non-lease components from lease components and instead account for all components as a lease. [IFRS 16:13-15]
Lessors shall allocate consideration in accordance with IFRS 15 Revenue from Contracts with Customers.
[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 unguaranteed residual value equal to the sum of (i) the fair value of the underlying asset and (ii) any initial direct costs of the lessor.
The non-cancellable period for which a lessee has the right to use an underlying asset, plus:
a) periods covered by an extension option if exercise of that option by the lessee is reasonably certain; and
b) periods covered by a termination option if the lessee is reasonably certain not to exercise that option
Lessee’s 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 environment.
Upon lease commencement a lessee recognises 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. Adjustments may also be required for lease incentives, payments at or prior to commencement and restoration obligations or similar. [IFRS 16:24]
After lease commencement, 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 investment property and the lessee fair values its investment property under IAS 40; or
ii) the right-of-use asset relates to a class of PPE to which the lessee applies IAS 16’s revaluation 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 accumulated depreciation and accumulated impairment. [IFRS 16:30(a)]
The lease liability is initially measured at the present value of the lease payments payable over the lease term, discounted at the rate implicit in the lease if that can be readily determined. If that rate cannot be readily determined, the lessee shall use their incremental borrowing rate. [IFRS 16:26]
Variable lease payments that depend on an index or a rate are included in the initial measurement of the lease liability and are initially measured using the index or rate as at the commencement date. Amounts expected to be payable by the lessee under residual value guarantees are also included. [IFRS 16:27(b),(c)]
Variable lease payments that are not included in the measurement of the lease liability are recognised 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 subsequently remeasured to reflect changes in: [IFRS 16:36]
The remeasurements are treated as adjustments to the right-of-use asset. [IFRS 16:39]
Lease modifications may also prompt remeasurement of the lease liability unless they are to be treated as separate leases. [IFRS 16:36(c)]
A lessee may elect not to assess whether a COVID-19-related rent concession is a lease modification. A lessee that that applies the exemption accounts for COVID-19-related rent concessions as if they were not lease modifications. [IFRS 16:46A, 46B]
A lessee accounts for modifications required by the IBOR reform (modifications required as a direct consequence of the IBOR reform and made on an economically equivalent basis) by updating the effective interest rate. All other modifications are accounted for using the applicable requirements. [IFRS 16:105-106]
Lessors shall classify each lease as an operating lease or a finance lease. [IFRS 16:61]
A lease is classified as a finance lease if it transfers substantially all the risks and rewards incidental to ownership of an underlying asset. Otherwise a lease is classified as an operating lease. [IFRS 16:62]
Examples of situations that individually or in combination would normally lead to a lease being classified as a finance lease are: [IFRS 16:63]
Upon lease commencement, a lessor shall recognise assets held under a finance lease as a receivable at an amount equal to the net investment in the lease. [IFRS 16:67]
A lessor recognises finance income over the lease term of a finance lease, based on a pattern reflecting a constant periodic rate of return on the net investment. [IFRS 16:75]
At the commencement date, a manufacturer or dealer lessor recognises selling profit or loss in accordance with its policy for outright sales to which IFRS 15 applies. [IFRS 16:71c)]
A lessor recognises operating lease payments as income on a straight-line basis or, if more representative of the pattern in which benefit from use of the underlying asset is diminished, another systematic basis. [IFRS 16:81]
To determine whether the transfer of an asset is accounted for as a sale an entity applies the requirements of IFRS 15 for determining when a performance obligation is satisfied. [IFRS 16:99]
If an asset transfer satisfies IFRS 15’s requirements to be accounted for as a sale the seller measures the right-of-use asset at the proportion of the previous carrying amount that relates to the right of use retained. Accordingly, the seller only recognises the amount of gain or loss that relates to the rights transferred to the buyer. [IFRS 16:100a)]
If the fair value of the sale consideration does not equal the asset’s fair value, or if the lease payments are not market rates, the sales proceeds are adjusted to fair value, either by accounting for prepayments or additional financing. [IFRS 16:101]
A seller-lessee subsequently measures lease liabilities arising from a leaseback in a way that it does not recognise any amount of the gain or loss that relates to the right of use it retains. [IFRS 16:102A]
The objective of IFRS 16’s disclosures is for information to be provided in the notes that, together with information 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. Paragraphs 52 to 60 of IFRS 16 set out detailed requirements for lessees to meet this objective and paragraphs 90 to 97 set out the detailed requirements for lessors. [IFRS 16:51, 89]
An entity applies IFRS 16 for annual reporting periods beginning on or after 1 January 2019. Earlier application 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 application. [IFRS 16:C3]
A lessee shall either apply IFRS 16 with full retrospective effect or alternatively not restate comparative information but recognise the cumulative effect of initially applying IFRS 16 as an adjustment to opening equity at the date of initial application. [IFRS 16:C5, C7]