BLM00240 - Introduction: Lease accounting: Outline of IFRS 16 lease accounting

In January 2016 IFRS 16 Leases was issued and is mandatory for all accounts prepared using IFRS that commence on or after the 1 January 2019. Entities have the option to early adopt the standard. In addition if an entity uses the UK GAAP standard FRS 101 then they will also have to adopt IFRS 16 from the effective date.

IFRS 16 takes a different approach to FRS 102 in determining whether a contract is, or contains a lease. This is explained at BLM00025.

Lessor accounting under IFRS 16 is similar to lessor accounting under FRS 102. The lessor is required to make a judgement whether a lease is a finance lease if, in substance, the lessee carries the risks and rewards of ownership. If the lessor does not account for the lease as a finance lease it is accounted for as an operating lease. Once the distinction has been made the lessor will account for the lease for all intents and purposes in the same way as a lessor using FRS 102. See BLM00220 and BLM00225.

Lessee accounting under IFRS 16 is very different. 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 (‘ROU’) asset and lease liability will be recognised at the commencement of the lease.

The ROU 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.

Further detail on lease accounting under IFRS 16 is at BLM17000.