Effective from I January 2019, IFRS 16 was created to address the criticism of the lease accounting requirements its predecessor IAS 17 for failing to meet the needs of users of the financial statements, particularly because IAS 17 does not require lessees to recognise assets and liabilities arising from operating leases.
IFRS 16 addresses those criticisms by requiring lessees to recognise most leases on their balance sheets and providing enhanced disclosures. The IASB view is that the new standard accounting will will result in a more faithful representation of lessees’ assets and liabilities and greater transparency of lessees’ financial obligations and leasing activities in the financial statements.
Under IFRS 16, leases are accounted for based on a ‘right-of-use model’. The model reflects that, at the commencement date, a lessee has a financial obligation to make lease payments to the lessor for its right to use the underlying asset during the lease term. The lessor conveys that right to use the underlying asset at lease commencement, which is the time when it makes the underlying asset available for use by the lessee.
Recognition exceptions exist for leases with a lease term of 12 months or less and containing no purchase options – this election is made by class of underlying asset; and
leases where the underlying asset has a low value when new (such as personal computers or small items of office furniture) – this election can be made on a lease-by-lease basis.
The IASB (IFRS) issued the standard after joint deliberations with the Financial Accounting Standards Board (FASB-US GAAP), which issued a similar standard. Significant differences exist between the IASB and FASB standard. These differences will result in certain transactions being accounted for differently under IFRS and US GAAP.
We are offering tailored solutions to assist entities in the implementation of all requirements of IFRS 16 standard: identification of leases within the scope the standard, use of proper incremental rate, separating components of a contract, accounting entries and disclosures.
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