Accounting for Leases under IFRS 16: An Overview

Accounting for leases…a broad accounting topic that transcends industries and, under IFRS 16, makes its way to most balance sheets. It’s hard to find a company without at least one lease! Which is why this post will provide an overview of IFRS 16 requirements. We’ll also discuss our training that is available for you to continue your quest for knowledge about lease accounting under IFRS!

Overview of IFRS 16

IFRS 16 applies to all leases, including subleases, with only a few exceptions. It provides guidance for both lessees and lessors. However, before applying lease accounting, entities first need to determine whether a contract is a lease or contains a lease. This can be challenging as not all contracts that meet the definition of a lease are clearly labeled as such.

IFRS 16 states that “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”. It also provides guidance on applying this definition. In addition, a contract may contain a lease component and non-lease component(s). The non-lease components should be separated and accounted for under their applicable standard (e.g., IFRS 15, Revenue from Contracts with Customers) unless a practical expedient applies and is elected.

Next up, before we can apply debits and credits to account for the lease, we must determine the lease term, lease payments, and the discount rate. These key concepts are applicable to both lessees and lessors.

GAAP D Course: Leases: Overview of IFRS 16

Want to learn more about key concepts of IFRS 16, as well as how to determine the lease term, lease payments, and the discount rate? Well, you’re in luck! Check-out our Leases: Overview of IFRS 16 course. By the end of this course, you should be able to:

• Identify the proper accounting for leases by both lessees and lessors
• Recognize whether a contract, or part of a contract, contains a lease and is within the scope of IFRS 16
• Recall the key concepts and inputs related to accounting for leases under IFRS 16

Overview of lessee accounting

Under IFRS 16, all leases will be recorded on the balance sheet, with the exception of short-term leases if the lessee elects the recognition and measurement exemption for those short-term leases. Therefore, at the commencement date of a lease, the lessee calculates and records a lease liability and a right of use asset.

Subsequent accounting for the lease liability by a lessee involves:

• Increasing the carrying amount of the lease liability to reflect interest on the lease liability (Interest should be the amount that produces a constant periodic rate of interest on the remaining balance of the lease liability),
• Reducing the carrying amount of the lease liability to reflect the lease payments made,
• Remeasuring the carrying amount of the lease liability to reflect any lease reassessments, lease modifications, or to reflect revised in-substance fixed lease payments

A lessee should recognize, generally in profit or loss, both interest on the lease liability and any variable lease payments incurred that were not included in the measurement of the lease liability.

IFRS requires the lessee to subsequently measure the right-of-use asset by applying a cost model unless it applies the fair value model (IAS 40) or the revaluation model (IAS 16). Under the cost model, a lessee should measure the right-of-use asset at cost:

• Less any accumulated depreciation and any accumulated impairment losses; and
• Adjusted for any remeasurement of the lease liability

The right-of-use asset is subject to impairment considerations and the lessee should apply IAS 36 when determining if the right-of-use asset is impaired.

GAAP D Course: Leases: Lessee Accounting and Application Issues

Looking for more information on lessee accounting under IFRS 16? It’s your lucky day again! Check-out our IFRS 16 course on Lessee Accounting requirements. This course discusses the initial recognition, initial measurement, and subsequent measurement of leases from the lessee’s perspective. It also covers how to account for changes to the lease arrangement after the commencement date.

Other areas covered by IFRS 16

IFRS 16 includes guidance on numerous additional topics not covered by this post, including:

• Lessor lease accounting
• Short-term lease exemption
• Low value lease exemption
• Lease remeasurements
• Lease modification
• Accounting for initial direct costs
• Sale-leaseback
• Subleases
• Presentation and disclosure
• And many others!

About GAAP Dynamics
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Disclaimer
This post is for informational purposes only and should not be relied upon as official accounting guidance. While we’ve ensured accuracy as of the publishing date, standards evolve. Please consult a professional for specific advice.