By LeaseCrunch® on May 26, 2022 at 9:00 AM
IFRS 16 is the most significant change to international lease accounting in the past 30 years, so you’d better buckle in and listen up.
The IASB, or the International Accounting Standards Board, created IFRS (International Financial Reporting Standard) 16 for lease accounting. The IFRS 16 effective date was January 1, 2019, and it replaced the IAS 17 lease accounting standard.
The prior standard, IAS 17, classified leases into two types: a finance lease and an operating lease. A lease was classified as a finance lease if the agreement between the two parties transferred the gains and liabilities associated with ownership to the lessee. All other leases were classified as operating leases.
IFRS 16 leases are now identified under a “right-of-use” model. If the company has control over that which they are leasing, then they must display it on the company balance sheet. Before, many companies didn’t have to document leases on their balance sheets because they could classify them as operating leases and effectively write them off as operational expenses, thereby avoiding the headache of accounting for IFRS 16 leases on the balance sheet.
So What Does IFRS Do?
The objective of IFRS 16 is to report information that properly and clearly represents lease transactions and provides a basis for users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. This accounting standard introduces a single lessee accounting model, whereas the IAS 17 bicameral model had two separate ways to classify a lease.
IFRS 16 is one of several standards that clarify lease accounting to the benefit of investors and interested parties and make sure that information for leased items is documented the same way for the utmost financial transparency. ASC 842 and GASB 87 are accounting standards in the United States that seek to increase the stringency around how IFRS 16 leases are represented on balance sheets so investors and other financially-interested parties have the full picture of their investments’ (or potential investments’) financial standing.
What is IFRS 16 Leases?
IFRS 16 leases are those that have a term of more than 12 months (unless the underlying value of the leased asset is low). Leases of this duration and longer are required to have an asset and liability recognized by the lessee.
What is IFRS 16 Compliance?
In order to meet the requirements of IFRS 16, lessees must recognize an asset and liability for a lease. Since IFRS introduced a single lessee accounting model, all lessees must recognize assets and liabilities for all leases with a term of more than 12 months, unless the underlying asset is of a very low value. Specifically, a lessee must recognize its right to use an underlying leased asset as well as any lease liability that represents its obligation to make the lease payments.
Long story short, a lease under IFRS 16 is the identified asset plus the control over use. As much as the new right-of-use model implemented by IFRS 16 helps the clarity of financial documentation, it also makes it more difficult to do accounting for IFRS 16 leases.
Who Does IFRS 16 Apply To?
These changes apply to organizations that are already using the reporting method of the IFRS, so international companies or public limited companies (PLCs). Public limited companies are the UK equivalent of a US corporation or Inc.
Because IFRS 16 has such a low bar for what classifies as a lease, determining the balance sheets for companies with many leases can be a big lift. Here you can read about several reasons why companies should not be using spreadsheets for their lease accounting. Fortunately, lease accounting software exists to do calculations in a few seconds that would take accountants many hours.
What is the Simplified Approach to IFRS 16?
The simplified approach to IFRS 16 involves LeaseCrunch’s lease accounting software. With the necessary increased due diligence for lease documentation and accounting comes increased error and time expenditure for your company. Get all of your lease accounting done quickly and accurately with our easy-to-use software that provides you with:
- Efficiency: Manual calculations take time, especially with the more intricate lease accounting standards introduced by IFRS 16. Software can crunch numbers with speed and accuracy and save you money and time.
- Ease of use: Software should simplify implementing the new IFRS 16 standard, not make it more confusing. Look for lease accounting technology that has a user-friendly interface for ease of use and is able to integrate into your existing tech stack.
- Customization and control: Look for a software that scales to your business and is configurable to the features and functions you want.
- Security: Choosing a software solution that is secure is just as important as choosing one that is fast and accurate.
- Expertise: Make sure to select software created by accounting experts, not just software engineers. Here at LeaseCrunch, we specialize in software solutions to ease the burden of lease accounting on your firm.
Is IFRS 16 mandatory?
IFRS 16 is mandatory for all companies within its scope, so mainly international companies or public limited companies.
Is IFRS 16 applicable to SME?
SMEs, or small and medium-sized enterprises, are businesses with a certain amount of revenue, assets, and employees. They represent 99% of all businesses in the EU. IFRS for SMEs is only updated periodically, and thus far a proposal was submitted in May of 2019 in the hopes of matching IFRS for SMEs to reflect the new IFRS 16 lease accounting standard, but it has yet to be approved and go into effect.
Does IFRS 16 apply to all leases?
IFRS 16 leases only include those 12 months and longer. If a lease has a duration of less than 12 months or a total value of less than $5,000, IFRS 16 does not apply.
Which leases are exempt from IFRS 16?
Leases exempt from IFRS 16 include those that are less than 12 months long, or have a total asset value of less than $5,000.