IFRS 16 Leases was issued in January 2016 and applies to annual reporting periods beginning on or after January 1, 2019. This new standard, which will affect almost all companies that prepare financial statements in accordance with IFRS. IFRS 16 requires that almost all leases are reflected on the balance sheet with a corresponding liability. Companies need to assess whether their contracts contain a lease.
A lease is a contract, or part of a contract, that conveys the right to control the use an asset (the underlying asset) for a period of time in exchange for consideration. Control is conveyed when a company has both the right to direct the identified asset’s use and to obtain substantially all the economic benefits from that use. An asset is typically identified by being explicitly specified in a contract, but an asset can also be identified by being implicitly specified at the time it is made available for use by the customer.
Where a company has a lease, it will, subject to certain exceptions, recognize a right-of-use asset and corresponding lease liability, considering all the facts and circumstances surrounding the inception of the contract.
A right-of-use asset is initially measured at cost, including initial amount of the liability adjusted for any lease payments at or before the commencement date less any lease incentives received plus any direct costs and estimated restoration costs. The right-of-use asset is subsequently depreciated similar to a company’s property, plant and equipment.
The lease liability is initially measured at the present value of the lease payments required over the lease term that are not paid as of the lease commencement date, discounted using the rate implicit in the lease or, if the implicit rate cannot be readily determined, the company’s incremental borrowing rate. Variable lease payments that do not depend on an index or rate are excluded from the initial measurement of the lease liability.
The recognition of the right-to-use asset and corresponding liability will result in a company recognizing a decrease in administrative expenses (i.e. rent), an increase in depreciation expense and an increase in finance costs.
Under IFRS 16, a company may elect to not recognize assets and liabilities for lease contracts with a term of 12 months or less and those such assets of low value.
Disclosure and Compliance:
IFRS 16 will require increased disclosure in the financial statements.
Please don’t hesitate to contact your DMCL advisor to help you understand the impact the new standard will have on your company and prepare for the transition to IFRS 16.