IFRS 16 will affect most companies involved in leasing that report under International Financial reporting Standards (IFRS). It will have a substantial impact on the financial statements of lessees of property and high value equipment – requiring that leases be placed on balance sheet by recognizing a right of use asset and a lease liability.
Previously, under IAS 17, financial statement users and analysts are forced to estimate off-balance sheet obligations, as operating leases are kept off the balance sheet. It can be difficult to compare businesses that lease assets with those that buy when operating leases are kept off balance sheet.
Now with the new standard IFRS 16, financial statement users can clearly see effect of operating leases and have useful basis for comparability with other companies.
Assets and liabilities arising from a lease are initially measured on a present value basis. The measurement includes non-cancellable lease payments (including inflation-linked payments), and also includes payments to be made in optional periods if the lessee is reasonably certain to exercise an option to extend the lease, or not to exercise an option to terminate the lease. The initial lease asset equals the lease liability in most cases.
The lease asset is the right to use the underlying asset and is presented in the statement of financial position either as part of property, plant and equipment or as its own line item.