IFRS 16 is the end-product of a project on lease accounting that was added to the IASB’s agenda over ten years ago. The initial discussion paper was published in 2009, followed by two exposure drafts. From the start, the IASB maintained its view that all leases should be “on-balance sheet”—a view that has inevitably been controversial. However, as the project progressed, the IASB looked for ways to simplify the requirements and reduce the controversy. The diagram below summarizes the key stages in IFRS 16’s development:
Practical insight – US GAAP convergence
The new lease standard started out as a joint project between the IASB and its US counterpart, the FASB. However, as the project progressed, the two boards have made different decisions in some areas. The outcome is that IFRS 16 and the new US standard are not fully “converged”. Two of the more significant differences are that the US standard
- will divide leases into two types for lessees (financing and operating), meaning both lease types will be “on-balance sheet” but the expense profile for operating leases will generally be “straight-line”; and
- will not provide an exemption for low-value asset leases.
Overview of IFRS 16
Lessees will account for leases “on-balance sheet” by recognizing a “right-of-use” asset and a lease liability. For many businesses, exemptions for short-term leases and leases of low-value assets will greatly reduce the impact.
The table below summarizes the main changes:
IFRS 16 applies to all leases for both the lessee and lessor, except for a few scope exclusions:
Practical insight – impact on investment property
Under IAS 17 and IAS 40 Investment Property, a lessee of property classified as investment property applies
- IAS 40 to its interest in the property if the lease is a finance lease (and can choose either the cost model or the fair value model); or
- IAS 17 if the lease is an operating lease (however, an investor-lessee can alternatively elect to treat the lease as a finance lease and apply IAS 40’s fair value model to its interest in the property).
The issuance of IFRS 16 resulted in extensive consequential amendments to IAS 40, including expanding its scope to include all investment property held under leases (including leases that would be classified as operating under IAS 17). IFRS 16 also applies to these leases. As a result, an investor-lessee recognizes a lease liability and a right-of-use asset. The right-of-use asset is accounted for
- at fair value in accordance with IAS 40 if the investor-lessee uses the fair value model for owned investment property; or, otherwise
- at cost less depreciation and impairment in accordance with IFRS 16.
The main change is therefore the accounting for investment property held under an operating lease (as defined by IAS 17). Under IFRS 16, these leases can no longer be accounted for off-balance sheet (unless the lease is short-term).