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| International Accounting standard(IAS) |
What is the International financial reporting standards (IFRS-16)? Describes in short:
IFRS -16 (International Financial Reporting Standard 16) is a standard issued by the International Accounting Standards Board (IASB) that provides guidance on lease accounting. It aims to bring greater transparency and consistency to lease accounting by requiring lessees to recognize most leases on their balance sheets.
Key aspects of IFRS 16 include:
1.Lessee Accounting:
Under IFRS -16, lessees are required to recognize a right-of-use (ROU) asset and a corresponding lease liability for virtually all leases.
Right-of-use asset: This represents the lessee's right to use an underlying asset during the lease term.
2.Lease liability:
This represents the obligation to make lease payments over the lease term.The lease liability is measured at the present value of future lease payments, discounted using the interest rate implicit in the lease (if known) or the lessee's incremental borrowing rate.
3.Lease Term:
The lease term includes the non-cancellable period of the lease, as well as periods covered by an option to extend the lease (if it is reasonably certain that the lessee will exercise the option) or an option to terminate the lease (if it is reasonably certain the lessee will not exercise the option).
4.Recognition and Measurement:
The initial recognition of both the right-of-use asset and the lease liability is done at the commencement of the lease.
Subsequently, the right-of-use asset is amortized over the lease term, and the lease liability is reduced as lease payments are made, with interest expense recognized on the liability.
5.Exemptions for Lessees:
IFRS 16 provides exemptions for short-term leases (12 months or less) and leases of low-value assets (such as office furniture or small IT equipment). For these leases, lessees can opt for a simpler accounting treatment, recognizing lease payments as an expense on a straight-line basis over the lease term.
6.Lessor Accounting:
For lessors, IFRS 16 largely retains the accounting treatment under the previous standard (IAS 17). Lessors continue to classify leases as finance leases or operating leases.
In finance leases, the lessor recognizes a receivable for the net investment in the lease.
In operating leases, the lessor continues to recognize the leased asset on its balance sheet and recognizes rental income over the lease term.
7.Impact on Financial Statements:
The recognition of both the right-of-use asset and the lease liability results in higher assets and liabilities on the balance sheet for lessees.
The impact on the income statement includes the recognition of depreciation on the right-of-use asset and interest expense on the lease liability, replacing the operating lease expense recognized under the previous standard.
8.Disclosures:
Lessees must provide detailed disclosures about leases, including the total amount of lease liabilities, the breakdown of lease liabilities into current and non-current portions, and the amount of lease expenses recognized.
In short, IFRS 16 significantly changes the way leases are accounted for by lessees, requiring most leases to be brought onto the balance sheet. This increases transparency and gives a more accurate representation of a company’s financial position by recognizing both the assets and liabilities associated with leases.