BLM17050 - IFRS 16 accounting: Transition to IFRS 16

In the first period in which a lessee adopts IFRS 16, a lessee has two options on how to apply the standard to its leases.

If a full retrospective approach is used, the cumulative effect of initially applying IFRS 16 is recognised as an adjustment to equity at the date of initial application, and comparative figures for the end of the previous period are also restated to reflect the adoption of IFRS 16. This approach effectively restates the financial statements as if IFRS 16 had always been applied.

If a modified retrospective approach is used, the cumulative effect of initially applying IFRS 16 is recognised as an adjustment to equity at the date of initial application, but comparative figures for the previous period are not restated, but continue to reflect the lessee’s accounting policies under the previous standard used.

Under both approaches, as a practical expedient, an entity is not required to reassess whether a contract is, or contains, a lease at the date of initial application. Instead, the entity is permitted to only apply IFRS 16 to contracts that were previously identified as leases under IAS 17 and IFRIC 4.

IFRS 16 also sets out mandatory transition requirements in respect of sale and leaseback transactions and leases assumed by an entity as a result of a past business combination.

When applying the modified retrospective approach, there are a number of practical expedients available to lessees who previously accounted for operating leases under IAS 17 when considering:

• discount rates,
• initial direct costs,
• use of hindsight in determining the lease term at the date of initial application,
• whether right of use leases are onerous at the date of initial application, and
• short-term leases.

If you believe that there are issues with how an entity has accounted for the transition to IFRS 16 you should seek advice from an HMRC advisory accountant.