IFRS 16

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IFRS 16 is an International Financial Reporting Standard (IFRS) promulgated by the International Accounting Standards Board (IASB) providing guidance on accounting for leases. IFRS 16 was issued in January 2016 and will be effective for most companies that report under IFRS in 2019.^[1] Upon becoming effective, it will replace the earlier leasing standard, IAS 17.^[1] Users are permitted to transition to the new standard either by full retrospective application (i.e., restating all leases as if they had always been accounted for under IFRS 16, with the difference between asset and liability at the transition date charged to retained earnings) or by a cumulative catch-up methodology, in which finance leases continue unchanged while IAS 17 operating leases are converted to finance leases with the initial liability and asset equal to the present value of the remaining rent (using the lessee's incremental borrowing rate as the discount rate for the present value).

A primary principle of IFRS 16 is that all lessee leases should be reported on the balance sheet, although there are exceptions for small items (e.g., under $5000) and for leases with a term of 12 months or less.^[2] Under IFRS 16, a lessee is required to recognize an asset for the right to use the leased item and a liability for the present value of its future lease payments.^[1]

IFRS 16 requires lessors to classify leases as either an "operating lease" or a "financing lease."^[1] The lessor recognizes revenue under a financing lease as essentially interest payments on the amount financed. The lessor recognizes income under an operating lease on a systematic consistent with the benefits derived from the leased assets, which may be a straight-line basis.^[1]

IFRS 16 was developed in collaboration with the Financial Accounting Standards Board (FASB) in the United States, but while the new FASB leasing standard will share many common features with IFRS 16, such as reporting all large leases on the balance sheet, there will be some significant differences between the two standards.^[2]

According to IASB chairman Hans Hoogervorst, “These new accounting requirements bring lease accounting into the 21st century, ending the guesswork involved when calculating a company’s often-substantial lease obligation. The new standard will provide much-needed transparency on companies’ lease assets and liabilities, meaning that off balance sheet lease financing is no longer lurking in the shadows. It will also improve comparability between companies that lease and those that borrow to buy.”^[3]

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