Accounting for Leases: Comparing IFRS 16 and IAS 17 Standards

This report provides a comprehensive comparison of IFRS 16 and IAS 17, the key accounting standards for leases. It begins with an introduction to the new IFRS 16 standard and its major changes compared to IAS 17, highlighting the shift towards recognizing assets and liabilities to improve transparency. The discussion section delves into the specific accounting requirements of both standards, outlining their different approaches to lease classification (finance vs. operating) and recognition criteria. The report then examines the rationale behind introducing IFRS 16, addressing the issues with the previous standard and the benefits of the new approach. Furthermore, it analyzes the impact of IFRS 16 on financial statements, including changes in the balance sheet, profit and loss statement, and cash flow statements, as well as key financial metrics like EBITDA, return on capital investment, and leverage ratios. The report concludes by summarizing the key differences between the standards and the overall impact of IFRS 16 on financial reporting and analysis.

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Table of Contents
Introduction................................................................................................................................2
Discussion..................................................................................................................................2
IFRS 16 Leases and Standard IAS 17....................................................................................2
Issues and Reasons behind Introducing New Standard..........................................................3
IFRS 16 Impact upon the Financial Statement......................................................................3
Conclusion..................................................................................................................................4
Reference....................................................................................................................................5

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Introduction
The new standards about the accounting of lease IFRS 16 has been issued and it has
been introduced with the few major changes. This new standard will help the companies in
not only recognizing the new assets and liabilities but it will also bring transparency to
balance sheet. Hence, under this assignment discussion will be based on the key accounting
requirements of IFRS 16 and comparison to IAS 17. Moreover, issues and the causes behind
the new standard introduction will also be discussed. Lastly, evaluation will be done on the of
IFRS 16 impact on the company’s financial statements with the assets under lease and
interpretations of those financial statements with the particular reference to the ratios.
Discussion
IFRS 16 Leases and Standard IAS 17
IFRS 16 has been issued in January 2016 and it becomes effective for those
companies, which report under IFRS from January 1 2019. It is the International Financing
Reporting Standard that is issued by IASB, which provides guidance on the accounting for
lease. The aim of the new standard is for reporting the information that helps in faithfully
representing the lease transactions and providing the basis for the financial statements users
for accessing the timing, amount and the uncertainty of the cash flows, which arises from
leases. Single lessee model of accounting has been introduced by the IFRS 16 for all the
leases with the term of more than the period of 12 months, until and unless the underlying
asset is of the lower value. Moreover, there is the requirement of the lessee to recognize the
right of use asset, which represents its right to using the underlying leased assets as well as
lease liability, which represents the obligations to make the payment of lease (Ifrs.org. 2019).
However, in case of IAS 17, it categories the leases into two parts. The first type is
finance lease, if the risks and the rewards that are incidental to the ownership are being

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transferred subsequently by lease. The second type is operating lease, the risks as well as
rewards that are incidental to ownership and are not being transferred by lease subsequently
(Xu, Davidson and Cheong 2017).
Issues and Reasons behind Introducing New Standard
Initially, the lease liability was considered at the payment’s present value of lease that
was payable over the term of lease and it was discounted rate implicit in lease if it can be
determined easily. In case, if the rate is not determined readily then the lessees have to use
the incremental rate of borrowing. In the current standard, IFRS 16, the rights of using the
asset and the lease liability are recognized by the lessee (Joubert, Garvie and Parle 2017). The
treatment of right of using the asset is similar to the other non-financial assets, it is
accordingly being depreciated, and liability accrues the interest. It produces the profile of
front loaded expenses as the assumption of linear depreciation of right of using the assets and
interest that are decreasing on the liabilities, leads to overall reduction of the expenses over
the period of reporting. In case of IAS 17, for the finance leases, the finance income over the
terms of lease are recognized by the lessor that are based on the pattern that reflects the
constant periodic rate of the return on the net investment. The lessor recognizes the payments
of the operating lease as the income based on the method of straight line or if more
representative pattern in case the benefit for using the underlying asset are reduced, other
systematic basis (Morales Díaz and Zamora Ramírez 2018).
IFRS 16 Impact upon the Financial Statement
The introduced current standard that is IFRS 16 has led to increase the assets that are
leased as well as financial liabilities on the lessee balance sheets, while there are also increase
in the lessee EBITDA. Moreover, it has changed the balance sheet, profit and loss statement
as well as statements of cash flow for the organizations with the leases of material off balance
sheet (Sacarin 2017). Hence, the organizations with the material off-balance sheet

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commitments of lease will be encountered with the changes that are significant in the key
financial metrics that are return on capital investment, leverage ratio as well as valuation
multiples. However, the policies of accounting will not affect the economic valuations but
IFRS 16 will be impacting the results of the valuations as well as it introduces the new scope
of attention in the valuation of business organization and transaction of M&A (Öztürk and
Serçemeli 2016).
Conclusion
Hence, it can be concluded from the analysis that IFRS 16 has set out the principles
for the recognizing, presenting, measuring as well as disclosing of the leases for customer as
lessee and supplier as lessor. It has bring the most of the leases on balance sheet for the
lessees under one single model by removing the difference between the operating as well as
finance leases that was in IAS 17. Moreover, in balance sheet, the lessee recognizes the
liability and assets for lease and in the profit and loss statement; the lessee recognizes the
depreciation and cost of interest of leased asset in comparison to expenses of operating
leases.

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Reference
Ifrs.org. (2019). IFRS. [online] Available at: https://www.ifrs.org/issued-standards/list-of-
standards/ifrs-16-leases/ [Accessed 21 Jul. 2019].
Joubert, M., Garvie, L. and Parle, G., 2017. Implications of the New Accounting Standard for
Leases AASB 16 (IFRS 16) with the Inclusion of Operating Leases in the Balance Sheet. The
Journal of New Business Ideas & Trends, 15(2), pp.1-11.
Morales Díaz, J. and Zamora Ramírez, C., 2018. IFRS 16 (leases) implementation: Impact of
entities’ decisions on financial statements. Aestimatio: The IEB International Journal of
Finance, 17, 60-97.
Öztürk, M. and Serçemeli, M., 2016. Impact of New Standard" IFRS 16 Leases" on
Statement of Financial Position and Key Ratios: A Case Study on an Airline Company in
Turkey. Business and Economics Research Journal, 7(4), p.143.
Sacarin, M., 2017. IFRS 16 “Leases”–consequences on the financial statements and financial
indicators. The Audit Financiar journal, 15(145), pp.114-114.
Xu, W., Davidson, R.A. and Cheong, C.S., 2017. Converting financial statements: operating
to capitalised leases. Pacific accounting review, 29(1), pp.34-54.