What is IFRS 16?
IFRS 16, Leases, is the IFRS standard that sets how leases are recorded. Since 1 January 2019 it has required lessees to put almost every lease on the balance sheet as a right-of-use asset and a lease liability, with exemptions for leases of 12 months or less and leases of low-value assets. It replaced IAS 17.
Also calledIFRS 16 Leases
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- Effective
- Periods from 1 January 2019
- Exemptions
- 12 months or less, low-value assets
- Replaced
- IAS 17
How IFRS 16 works
IFRS 16 uses a single lessee model. The lease liability is the present value of future lease payments; the right-of-use asset starts at the same amount plus initial direct costs and prepaid rent, less incentives. In the income statement, the old rent expense is replaced by depreciation of the asset and interest on the liability. That raises EBITDA and operating profit, front-loads total expense, and moves the principal part of lease payments from operating to financing cash flows. Lessor accounting barely changed from IAS 17: lessors still classify leases as finance or operating. Under US GAAP, ASC 842 brings leases onto the balance sheet too, but keeps an operating lease category with a straight-line expense, so the two standards produce different profit figures for the same lease.
Common questions
How does IFRS 16 affect EBITDA?+
It raises EBITDA, because rent expense is replaced by depreciation and interest, which are both excluded from EBITDA. Net debt also rises, because lease liabilities count as borrowings.
What is a low-value asset under IFRS 16?+
An asset that is low in value when new, such as a laptop or small office furniture. Lessees may choose to expense these leases rather than record them on the balance sheet.
What is the difference between IFRS 16 and ASC 842?+
Both put leases on the balance sheet. IFRS 16 treats all lessee leases like financed purchases; ASC 842 keeps operating leases with a single straight-line expense, so profit and cash flow presentation differ.
Software for IFRS 16 lease accounting
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