IFRS 16 is an

International Financial Reporting Standard International Financial Reporting Standards, commonly called IFRS, are accounting standards issued by the IFRS Foundation and the International Accounting Standards Board (IASB). They constitute a standardised way of describing the company's f ...

(IFRS) promulgated by the

International Accounting Standards Board The International Accounting Standards Board (IASB) is the independent accounting standard-setting body of the IFRS Foundation. The IASB was founded on April 1, 2001, as the successor to the International Accounting Standards Committee (IASC). ...

(IASB) providing guidance on accounting for

lease A lease is a contractual arrangement calling for the user (referred to as the ''lessee'') to pay the owner (referred to as the ''lessor'') for the use of an asset. Property, buildings and vehicles are common assets that are leased. Industrial ...

s. IFRS 16 was issued in January 2016 and is effective for most companies that report under IFRS since 1 January 2019. Upon becoming effective, it replaced the earlier leasing standard,

IAS 17 IAS may refer to: Science * Institute for Advanced Study, in Princeton, New Jersey, United States * Image Analysis & Stereology, the official journal of the International Society for Stereology & Image Analysis. * Iowa Archeological Society, Uni ...

. IFRS 16 has a substantial impact on the financial statements of lessees of property and equipment – requiring that leases be placed on-balance sheet by recognising a ‘right-of-use’ asset and a lease liability.

Motivation to introduce IFRS 16

According to IASB chairman

Hans Hoogervorst Johannes Franciscus "Hans" Hoogervorst (born 19 April 1956) is a retired Dutch politician of the People's Party for Freedom and Democracy (VVD) and economist. He is the former chairman of the International Accounting Standards Board (IASB) fro ...

, “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.” Disclosures made by public companies about the impact of IFRS 16 on their financial statements are a point of focus of European financial regulatory authorities.

Accounting by lessors

IFRS 16 substantially carries forward the lessor accounting requirements in IAS 17. Accordingly, a lessor continues to classify its leases as operating leases or finance leases.

Transition from IAS 17

Lessees are not required to follow the retrospective application requirements of

IAS 8 International Accounting Standard 8 ''Accounting Policies, Changes in Accounting Estimates and Errors'' or IAS 8 is an international financial reporting standard (IFRS) adopted by the International Accounting Standards Board (IASB). It prescribe ...

. IFRS 16 allows a modified retrospective approach under which comparative periods are not restated. Instead, the cumulative effects of applying IFRS 16 are recognised as an adjustment to the opening balance of equity at the application date.

Convergence with US GAAP

IFRS 16 was developed in collaboration with the

Financial Accounting Standards Board The Financial Accounting Standards Board (FASB) is a private standard-setting body whose primary purpose is to establish and improve Generally Accepted Accounting Principles (GAAP) within the United States in the public's interest. The Securi ...

(FASB) in the United States, but while the new FASB leasing standard shares 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. In particular, lessees no longer classify their leases between operating and finance under IFRS 16, but will continue to do so under US GAAP.

References

{{International Financial Reporting Standards International Financial Reporting Standards Leasing