BLM52005 - IFRS 16 leases: IFRS 16 lessees: The spreading rules

Adoption of IFRS 16 means that, for lessees, the timing of the recognition of amounts payable under a lease may change.

The lessee will recognise assets and liabilities for all leases with a term of more than 12 months, unless the underlying asset is of low value. The lessee will recognise a right-of-use asset representing its right to use the underlying asset and a lease liability representing its obligation to make lease payments.

The lessee will recognise depreciation of the right-of-use asset and interest on the lease liability.

See BLM50005 for more details of IFRS 16 accounting and BLM17000 for more details of the accounting for such changes.

Because of the requirement to recognise the finance cost element (the interest charge) as an amount which maintains a constant rate on the outstanding liability, the accounting profit and loss charges will be accelerated compared with operating leases under pre-IFRS 16 accounting. The finance cost will be higher in the earlier years of a lease because the amount of the liability is also higher in those years.

All of a lessee’s existing leases will be evaluated on adoption of IFRS 16, and a transitional adjustment is likely to arise on many leases previously accounted for as operating leases when comparing IFRS 16 to IAS 17 or FRS 102. Adjustments will also depend on the transition method adopted – see BLM17050.

The legislation in Schedule 14 to the Finance Act 2019 ensures that any transitional adjustments arising following the adoption of IFRS 16 are spread over a number of years, smoothing the tax effect of the adoption of the new standard.

Where a right of use asset in respect of an existing lease is first recognised on adoption of IFRS 16 in a period of account beginning on or after 1 January 2019, a lessee is required to spread all adjustments required in consequence of adopting IFRS 16 across the mean average length of the leases which have given rise to the adjustments.