IFRS 16 Leases

The objective of IFRS 16 is to establish principles for the recognition, measurement, presentation, and disclosure of leases to ensure that lessees and lessors provide relevant information in financial statements.

Under IFRS 16, lessees are required to recognize all leases on the balance sheet, with a right-of-use (ROU) asset and a corresponding lease liability. Previously, leases were classified as operating or finance leases, and operating leases were off-balance-sheet.

Right-of-use (ROU) asset: Recognized at the present value of lease payments plus initial direct costs.
Lease liability: Recognized at the present value of future lease payments.

Over the lower of the lease term and life of the asset

The lease liability is measured at the present value of lease payments due over the lease term, using the interest rate implicit in the lease or the lessee’s incremental borrowing rate if the implicit rate cannot be readily determined.

Fixed payments (including in-substance fixed payments)
Variable lease payments based on an index or rate
Amounts expected to be payable under residual value guarantees
Exercise price of purchase options (if reasonably certain to be exercised)
Termination penalties (if reasonably certain to terminate the lease early)

Finance cost (Interest expense): Recognized in profit or loss over the lease term.
Principal repayments: Reduces the lease liability on the balance sheet.

A: For leases with a lease term of 12 months or less and no purchase option, lessees can elect not to recognize the ROU asset and lease liability. Instead, lease payments are expensed on a straight-line basis.

: Lessees can exempt leases of low-value assets (e.g., personal computers, office furniture) from the requirement to recognize a ROU asset and lease liability, and instead expense lease payments.

The total lease liabilities
Maturity analysis of lease liabilities
Expense recognized from short-term leases and low-value leases
Reconciliation of the opening and closing balances of ROU assets and lease liabilities

In a sale and leaseback transaction, the seller-lessee must derecognize the asset sold, and the leaseback is treated as a lease under IFRS 16. Any profit or loss on the sale is recognized based on the transaction’s classification (whether it is a finance or operating lease).