IFRS 16 Practical Expedients and How to Manage Them

How IFRS 16 Lease Accounting Practical Expedients Came to Be

Practical expedients are critical in driving the adoption of the IFRS 16 lease standard for lessees of property and equipment. 

In short, they help simply the transition from the previous standard. 

The International Accounting Standards Board (IASB) amended the new IFRS leases standard to provide lease accounting practical expedients in response to the major challenges reported associated with lease accounting compliance. The concerns reported by stakeholders were about two main issues.

First, there can be difficulty when defining standalone selling prices for lease and non-lease components that are not sold separately. Second, there is the issue of the significance of data regarding the separate components to users of the financial statements.

Options Available to Lessees

IFRS 16 calls for lessees to separate lease components from non-lease components, using only the lease components in calculating the lease liability and right of use asset. This is easy in the case of net leases, where non-lease components are invoiced separately.

In the case of gross leases and modified gross leases, where some or all of the non-lease components are included in rent, separation of components is still required, although it may be difficult. Lessees may apply a practical expedient to not separate the components.

This election is made by the class of underlying assets and must then be applied to all leases in the class. The expedient makes the management of leases easier, but it does result in higher liability and asset balances. Entities should therefore consider the impacts carefully before taking the expedient.

IFRS 16

Everything you need to know about the international accounting standard

IFRS 16

Required Criteria for IFRS 16 Accounting

Electing this practical expedient is a commitment. Any lessee that chooses the practical expedient for an asset class is required to apply it consistently to all eligible non-lease components in that class. In other words, a lessor cannot selectively apply this classification method.

An additional practical expedient allows lessees to apply the standard “to a portfolio of leases with similar characteristics if the entity reasonably expects that the effects on the financial statements … to the portfolio would not differ materially from … the individual leases within that portfolio”. This is similar to the permitted portfolio approach under ASC 842, except that IFRS 16 specifically refers to this as a practical expedient.

There are also a series of practical expedients to be selected at initial adoption of the IFRS 16 standard. In most cases, these are moot as the standard was initially adopted 1 January 2019, although some nations are adopting at a later date.

Most notable are elections to not reassess whether an agreement contains a lease, and to determine the initial value of the Right of Use Asset when a lease was previously classified as an operating lease.

Whether a business opts in or out of the practical expedient available for lease accounting compliance, choosing a proven lease accounting solution allows you to manage leases in the manner that best suits company practices and processes.

If you're interested in a comprehensive solution that keeps you audit-ready for any standard with advanced automation, reach out today for a demo and pricing from the team at CoStar Real Estate Manager.