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IFRS 16 Leases

IFRS 16 Leases prescribes a single lessee accounting model that requires the recognition of asset and corresponding liability for all leases with terms over 12 months unless the underlying asset is of low value. Lessors continue to apply a two-model approach.

Published January 2016. Effective 1 January 2019


IFRS 16 Leases: Putting theory into practice

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IFRS 16 replaces IAS 17. It provides a single lessee accounting model to be applied to all leases, whilst retaining a two model approach for lessors.

Lessees recognise a right-of-use asset and a lease liability on the commencement of a lease. 

  • The asset is initially recognised at the amount of the lease liability plus initial direct costs; it is subsequently measured using the cost model unless the underlying asset is investment property measured at fair value or PPE measured under the revaluation model.
  • The liability is initially measured at the present value of the lease payments over the lease term, discounted at the rate implicit in the lease.

An election can be made on a lease-by-lease basis to apply alternative accounting treatment to leases with a term of less than 12 months and leases for low value assets. In this case lease payments are recognised as an expense on a straight-line basis, or another systematic basis, over the lease term.

Lessors classify leases as either operating or finance leases:

  • Operating lease income is recognised on a straight line basis over the lease term; the underlying asset is presented in the statement of financial position (balance sheet).
  • Finance lease income is recognised over the period of the lease to reflect a constant periodic rate of return; the underlying asset is derecognised and a receivable recognised instead, measured initially at the net investment in the lease.

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