IFRS 16

What is IFRS 16?

IFRS 16 is the current international financial reporting standard for lease accounting that requires all leases longer than 12 months to be recorded as assets and liabilities on balance sheets. The International Accounting Standards Board, or IASB, established this new standard in 2016 to foster more transparency between investors and companies.

As an international standards board, the IASB does not have the regulatory authority to establish IFRS 16 as the GAAP standard for any nation. Instead, most national standard boards have either adopted IFRS 16, either in whole or with small modifications, as their own GAAP standard. For example, in Australia the standard is adopted under the identification AASB 16.

What is Lease Accounting?

Lease accounting is the process by which a company records the financial impacts of its leasing activities. Leases that meet specific classification requirements must now be recorded on a company's financial statements according to current national GAAP guidance.

What Other Lease Accounting Standards Exist?

FRS 102 is the standard specific to Small and Medium non-listed entities (SMEs) in the United Kingdom and Republic of Ireland. It is being revised to align with IFRS 16, effective 1 January 2026.

ASC 842 is the current US standard for GAAP lease accounting that requires all leases longer than 12 months to be recorded as assets and liabilities on balance sheets. The Financial Accounting Standards Board, or FASB, established this new standard in 2016 to foster more transparency between investors and companies.

State and local governments in the United States report leases under the Government Accounting Standards Board’s (GASB) Statement 87. The Federal government, as well as other governments around the world, have different standards.

What is the difference between ASC 842 vs. IFRS 16?

The most significant difference ASC 842 vs. IFRS 16 is the definition of a lease. ASC 842 defines two types of lease classifications – operating leases and finance leases. IFRS defines all leases as finance leases.

With ASC 842, only property and equipment are within scope of the new guidance whereas all intangible assets are exempt. Under IFRS 16, lessees may apply the guidance to leases of intangible leased assets as well.

Both ASC 842 and IFRS 16 apply only to leases with a term longer than 12 months. Additionally, IFRS 16 allows exclusion of low-value assets.

What is an Operating Lease?

Operating (expense) leases existed under the previous IAS 17 standard. IFRS 16 classifies all expense leases as finance. However, some income leases may be classified as operating leases.

What is a Finance Lease?

A finance lease is a contract that that allows for the use of an asset and has at least one of five criteria making it like the purchase or conveyance of ownership at the end of the lease term.

What is the difference between an Operating (income) Lease and a Finance (income) Lease?

An operating lease is a contract that permits the use of an asset without transferring the ownership rights of said asset. A finance lease is a contract that permits the use of an asset and transfers ownership after the lease period is complete, or otherwise meets the tests of the major part of the economic life or substantially all of the economic value.

What are Short-Term and Low Value Leases?

A short-term lease is a lease whose duration at commencement is 12 months or less, and does not include an option to purchase the asset. Short-term treatment is an election which is made for an entire class of assets; that is, if the lease meets the requirements and is a class for which short-term treatment is selected, then the lease must be considered short term. Low value leases are for assets with a low value when new, regardless of the current age. Entities may use discretion when considering the value, although IASB uses a threshold of US$5,000 as guidance. This election is made on a case-by-case basis.

What is an Embedded Lease?

An embedded lease relates to an asset that is included as part of a service contract or agreement. Such assets were usually classified as operating leases under IAS 17. Now that all expense leases must be recognized on the balance sheet, the IFRS 16 standard is stricter about identifying these embedded leases.

What is a Right of Use Asset or ROU Asset?

The right of use asset is what a company recognizes on the balance sheet, representing the right to use the leased asset. ROU assets are considered intangible assets on the balance sheet, so they are amortized rather than depreciated. The ROU Asset is not the value of the underlying asset, it is the value of the right to use the asset for the lease term.

What is Sale Leaseback Accounting?

A sale and leaseback accounting transaction occurs when the seller transfers an asset to the buyer, and then leases the asset from the buyer. This arrangement most commonly occurs when the seller needs the funds associated with the asset being sold, despite still needing to occupy the space.

What is a Leasehold Improvement?

A leasehold improvement is a modification or enhancement made to a leased building space that has the right to use during the term of the lease. Leasehold improvements revert to the lessor at the expiration of the lease.

How does IFRS 16 account for Dilapidations or other End of Lease Obligations?

On initial measurement, a lessee is required to recognize dismantling, removal and restoration costs as part of the right-of-use asset. A reserve for that cost is recorded as an offsetting credit.

The liability associated with dismantling, removal and restoration costs is recognized and measured in accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets.

What is Deferred Rent?

Deferred rent occurs in lease accounting when the cash rent payments are different than its recognized financial statements and often occurs when a lessee is given free rent in one or more periods. Under IFRS 16 it is only a distinct item for short term and low value leases. For all others, it is absorbed into the ROU Asset.

What is the IFRS 16 Effective Date?

The IFRS 16 effective date was for fiscal years beginning after December 15, 2018. Unlike ASC 842, there was no separate effective date for non-public entities or private companies. Individual nations may adopt their versions of IFRS 16 as their national GAAP at some other date.

Who must comply with IFRS 16?

As an international standards board, the IASB does not have the regulatory authority to establish IFRS 16 as the GAAP standard for any nation. Instead, most national standard boards have either adopted IFRS 16, either in whole or with small modifications, as their own GAAP standard. Each national standard will stipulate who must comply with the national standard.

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