Summary of IFRS 16
IFRS 16 establishes principles for the recognition, measurement, presentation and disclosure of leases, with the objective of ensuring that lessees and lessors provide relevant information that faithfully represents those transactions. [IFRS 16:1]
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 Assets
A lessee can elect to apply IFRS 16 to leases of intangible assets, other than those items listed above. [IFRS 16:4]
Instead of applying the recognition requirements of IFRS 16 described below, a lessee may elect to account for lease payments as an expense on a straight-line basis over the lease term or another systematic basis for the following two types of leases:
i) leases with a lease term of 12 months or less and containing no purchase options – this election is made by class of underlying asset; and
[IFRS 16:5, 6 & 8]
Identifying a lease
A contract is, or contains, a lease if it conveys the right to control the use of an identified asset for a period of time in exchange for consideration. [IFRS 16:9]
Control is conveyed where the customer has both the right to direct the identified asset’s use and to obtain substantially all the economic benefits from that use. [IFRS 16:B9]
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.
However, where a supplier has a substantive right of substitution throughout the period of use, a customer does not have a right to use an identified asset. A supplier’s right of substitution is only considered substantive if the supplier has both the practical ability to substitute alternative assets throughout the period of use and they would economically benefit from substitution. [IFRS 16:B13-14]
A capacity portion of an asset is still an identified asset if it is physically distinct (e.g. a floor of a building). A capacity or other portion of an asset that is not physically distinct (e.g. a capacity portion of a fibre optic cable) is not an identified asset, unless it represents substantially all the capacity such that the customer obtains substantially all the economic benefits from using the asset. [IFRS 16:B20]
Separating components of a contract
For a contract that contains a lease component and additional lease and non-lease components, such as the lease of an asset and the provision of a maintenance service, lessees shall allocate the consideration payable on the basis of the relative stand-alone prices, which shall be estimated if observable prices are not readily available.
As a practical expedient, a lessee may elect, by class of underlying asset, not to separate non-lease components from lease components and instead account for all components as a lease. [IFRS 16:13-15]
Lessors shall allocate consideration in accordance with IFRS 15 Revenue from Contracts with Customers.
[IFRS 16: Appendix A]
Interest rate implicit in the lease
The interest rate that yields a present value of (a) the lease payments and (b) the unguaranteed residual value equal to the sum of (i) the fair value of the underlying asset and (ii) any initial direct costs of the lessor.
The non-cancellable period for which a lessee has the right to use an underlying asset, plus:
a) periods covered by an extension option if exercise of that option by the lessee is reasonably certain; and
b) periods covered by a termination option if the lessee is reasonably certain not to exercise that option
Lessee’s incremental borrowing rate
The rate of interest that a lessee would have to pay to borrow over a similar term, and with a similar security, the funds necessary to obtain an asset of a similar value to the right-of-use asset in a similar economic environment.
Accounting by lessees