Thursday, December 8, 2022

IFRS 16 Leases-International Financial Reporting Standard


IFRS 16 Leases

IFRS 16 introduces a single lessee accounting model and requires a lessee to recognise assets and liabilities for all leases with a term of more than 12 months, unless the underlying asset is of low value. A lessee is required to recognise a right-of-use asset representing its right to use the underlying leased asset and a lease liability representing its obligation to make lease payments.

IFRS 16 is effective for annual reporting periods beginning on or after 1 January 2019, with earlier application permitted.

The objective of IFRS 16 is to report information that (a) faithfully represents lease transactions and (b) provides a basis for users of financial statements to assess the amount, timing and uncertainty of cash flows arising from leases. To meet that objective, a lessee should recognise assets and liabilities arising from a lease.


IFRS 16 Leases applies to all leases, including subleases, except for: [IFRS 16:3]

  • leases to explore for or use minerals, oil, natural gas and similar non-regenerative resources;
  • leases of biological assets held by a lessee (see IAS 41 Agriculture);
  • service concession arrangements (see IFRIC 12 Service Concession Arrangements);
  • licences of intellectual property granted by a lessor (see IFRS 15 Revenue from Contracts with Customers); and
  • rights held by a lessee under licensing agreements for items such as films, videos, plays, manuscripts, patents and copyrights within the scope of IAS 38 Intangible 

Accounting by lessees

Upon lease commencement a lessee recognises a right-of-use asset and a lease liability. [IFRS 16:22]

The right-of-use asset is initially measured at the amount of the lease liability plus any initial direct costs/prepayments incurred by the lessee & minus any impairment on assets. Adjustments may also be required for lease incentives, payments at or prior to commencement and restoration obligations or similar. [IFRS 16:24]

Example of IFRS 16-In the example below, we’ll outline the steps to calculate the lessee’s opening lease liability and ROU asset and present the complete amortization schedule, followed by the initial transition journal entry and the journal entry for the first period’s activity.

Commencement Date: January 1, 2021

Lease Term: 10 years

Lease Payment (paid in arrears): $10,000 annually

Lessee’s Incremental Borrowing Rate: 6%

Useful Life of Underlying Asset: 25 years

Amortization schedule

Based on the facts above, we’ll take the following steps to generate the IFRS 16 amortization schedule:

Calculate the initial lease liability as the present value of the total remaining lease payments as of the commencement date.

  1.  Calculate the initial right-of-use asset as the lease liability at commencement plus or minus any necessary adjustments.
  2. Amortize the lease liability over the lease term to reflect both lease payments and interest on the liability using the effective interest method.
  3. Depreciate the ROU asset in a systematic and rational manner over the useful life of the underlying asset or the lease term, whichever is shorter.
  4. Using the values noted above, the amortization schedule at the commencement date of the lease is as follows:

IFRS 16 Lease Amortization Schedule

To calculate the present value of the future lease payments, apply the lessee’s incremental borrowing rate of 6%. Per IFRS 16, lessees are encouraged to use the rate implicit in their lease. However, if that is not readily determinable, then a lessee is provided further leeway to use their incremental borrowing rate as we have done in this example.

IFRS 16 Lease Amortization Schedule

Sale and leaseback transaction

A sale and leaseback transaction is a popular way for entities to secure long-term financing from substantial property, plant and equipment assets such as land and buildings.

 Please use the below link to have thorough understanding on the concept of sale & leaseback transaction.

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CA Divya Thakkar
Chartered accountant | IIM Bangalore 7+years of experience in Consultancy, Investment Banking, Ecommerce & IT Industry. Expert in IFRS, USGAAP, INDAS & US Regulatory requirement. Currently working with Deloitte Touche & Company in Risk ,Finance & Control advisory. Worked in Companies like Barclays Bank, HCL Technologies Ltd & BazaarCart.

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