Leases (IFRS 16)
The single lessee accounting model under IFRS 16, recognising a right-of-use asset and a lease liability for substantially all leases, plus the recognition exemptions and the retained lessor model. A practitioner’s guide to the standard that put most leases on the balance sheet.
The single lessee model
IFRS 16 removes the operating/finance lease distinction for lessees. At commencement, a lessee recognises a right-of-use asset and a corresponding lease liability for substantially all leases, changing both the balance sheet and the expense profile.
Measuring the liability and the asset
The lease liability is measured at the present value of the lease payments not yet paid, discounted at the interest rate implicit in the lease or the lessee’s incremental borrowing rate. The right-of-use asset starts at the liability amount plus initial direct costs and certain other adjustments.
Recognition exemptions
Lessees may elect not to apply the model to short-term leases (12 months or less) and to leases of low-value assets. Payments on those leases are recognised as an expense on a straight-line or other systematic basis.
Lessor accounting
For lessors, IFRS 16 substantially retains the previous model: leases are classified as finance or operating leases, and accounted for accordingly. This asymmetry between lessee and lessor accounting is a defining feature of the standard.
Written by the team at Finit Solutions, chartered accountants, Jersey.