IFRS 16 Leases: Implications for Lessor and Lessee

RUNNING HEAD: FINANCIAL ACCOUNTING AND REPORTING
IFRS 16 leases

Financial accounting and reporting 1
Contents
Introduction...........................................................................................................................................2
IFRS 16 Leases......................................................................................................................................2
Rationale behind the standard................................................................................................................3
Implications...........................................................................................................................................4
Lessor................................................................................................................................................4
Lessee................................................................................................................................................4
Companies most likely to be affected....................................................................................................5
Conclusion.............................................................................................................................................7
References.............................................................................................................................................8

Financial accounting and reporting 2
Introduction
A new standard for lease accounting has been developed by IASB named as IFRS 16 Leases.
It provides guidelines for lease accounting and state that the data reported must show the
accurate information about the lease transactions. The standard will come into effect from
January 1, 2019 and once applicable it will replace the old standard IAS 17 (Iasplus.com.
2018). The reports contains detailed information about IFRS 16, its implications on lessor
and lessee and the reasons behind introducing it. In the later part, it also discussed about the
companies which are likely to be affected by this.
IFRS 16 Leases
IASB published a new standard for lease reporting in January 2016, which will be in effect
from January 2019. It was introduced by IASB as part of joint project with FASB. It deals
with the new principles for disclosure and measurement of leases. A single lessee model was
established which requires a lessee to take into account all the liabilities and assets for the
leases that have a term period of more than 1 year (Deloitte UK. 2018). Under IFRS 16, lease
is defined as a contract in which customer (“lessee”) get a right to use an asset for a specified
period of time in exchange of some consideration (accaglobal.com. 2018). The introduction
of new standard will definitely impact several industries and also the accounting requirements
of lessee and lessor. The sectors which mainly get affected are retail, telecommunications,
banking, metal and mining, insurance and oil and gas entities.
However, entities that has applied for IFRS 15 Revenue from Contracts with Customers can
apply IFRS 16 in its lease accounting before its effective date. The main motive of bringing
this was to enhance the reporting of leases by eliminating their classification as financial and
operating lease. This elimination will enable the lessees to show all the leases on its balance
sheet so that true and fair picture can be represented (Ifrs.org. 2016).