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IFRS 16
Leases
IFRS 16, issued by the International Accounting Standards Board (IASB), replaces IAS 17 and introduces significant changes to lease accounting. It mandates lessees to recognize assets and liabilities for almost all leases, fundamentally altering how lease obligations are reported in the financial statements.

Objective
The objectives of IFRS 16 are:

  1. To increase transparency and comparability by requiring lessees to recognize lease assets and liabilities on the balance sheet, thereby providing a clearer picture of an entity’s lease commitments.
  2. To establish a single comprehensive model for lease accounting, eliminating the distinction between operating and finance leases.
  3. To align lease accounting more closely with the revenue recognition and control principles in IFRS 15, particularly for lessors.

Scope
IFRS 16 broadly applies to all leases, including contracts for the lease of equipment, property, and vehicles, but excludes:

  • Short-term leases (less than 12 months) which can be accounted for using a simplified approach.
  • Leases of low-value assets (e.g., small office equipment).
  • Service concessions, such as toll roads operated under governmental mandate.
  • Leases to explore for or use minerals, oil, natural gas and similar non-regenerative resources.

Measurements
The measurement under IFRS 16 includes:

  • Right-of-Use Asset: Initially measured at the present value of lease payments, adjusted by any lease incentives, initial direct costs, and restoration costs.
  • Lease Liability: Corresponds to the present value of future lease payments, using the lessee’s incremental borrowing rate or the interest rate implicit in the lease if readily determinable.

Classification
IFRS 16 removes the classification of leases as either operating or finance for lessees. All leases are treated in a similar manner to finance leases under IAS 17.

Presentation
Lease assets and liabilities are presented separately in the balance sheet. Lease expenses are split into depreciation of the lease asset and interest on the lease liability, enhancing transparency regarding an entity’s leasing activities.

Disclosure
Detailed disclosure requirements include:

  • Nature, terms, and conditions of leasing arrangements.
  • Information about significant assumptions and judgments in measuring leases.
  • Amounts recognized in the financial statements related to leases.

Other Issues

  • Transition Provisions: Entities can choose between a full retrospective or a modified retrospective approach when transitioning to IFRS 16.
  • Financial Impact: The introduction of IFRS 16 can significantly affect key financial metrics, such as debt ratios and EBITDA, due to the recognition of new assets and liabilities.
  • Lease Modifications: Specific guidance is provided for handling modifications that change the lease term or consideration.

Overall, IFRS 16 aims to bring greater transparency to an entity’s financial leverage and capital employed, thereby improving clarity for users of financial statements regarding the entity’s financial commitments. This standard is a substantial shift from the risk and rewards model to a right-of-use model, reflecting the evolving nature of asset use in modern economies.