BLM17005 - IFRS 16 accounting: Introduction and rationale for IFRS 16

Historically, users of IFRS have accounted for leases under IAS 17 Leases, which classifies leases as either ‘finance leases’ or ‘operating leases’.

The different treatment for leases mean that economically similar transaction can be accounted for differently, and therefore reduce comparability for users of the accounts. It also provided structuring opportunities for leasing arrangements to obtain a preferred accounting treatment.

The information disclosed in relation to operating leases were, in the opinion of IFRS, inadequate for users of financial statements, and resulted in users using a variety of estimation techniques, reducing comparability between different entities.

IFRS 16 has a single lessee accounting model that requires assets and liabilities arising from all but exempt lease agreements to be recognised on the balance sheet. The lessee will recognise an asset reflecting their right to use the leased asset for the lease term and a lease liability reflecting their obligation to make lease payments. Both the right-of-use asset and lease liability will be recognised at the commencement of the lease.

The right-of-use asset is depreciated, normally on a straight line basis, over the lease term. The interest on the lease liability is recognised so as to maintain a constant rate on the outstanding lease liability. Depreciation and interest on the lease liability are both recognised in the profit and loss account.