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Introduction to IFRS 16 (Leases) [Video]

Introduction to IFRS 16 (Leases)

IFRS 16 establishes the rules for the recognition, measurement, and disclosure of leases for both lessors and lessees.

The IASB issued IFRS 16 in January of 2016 (it replaced IAS 17).

IFRS 16 had a substantial impact on the accounting for lessees because it requires lessees to capitalize all leases (with two exceptions). This means lessees must recognize a right-of-use asset and a lease liability upon commencement of a lease.

The goal of IFRS 16 was to increase transparency in financial reporting. Prior to IFRS 16, lessees could structure leases so that the lease liability didn’t appear on their statement of financial position (aka balance sheet). Thus, leases were used as a means of off-balance sheet financing (to keep debt off a company’s balance sheet).

IFRS 16 affects the the financial statements of lessees in the following ways:
(1) they will report higher total assets and total liabilities than they would have reported under the old accounting rules
(2) expenses will be front-loaded, because more interest expense will be recognized in the early years of the lease when the lease liability is higher
(3) they will report a higher EBITDA than they would have reported under the old accounting rules
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