IFRS 16 / SLFRS 16 - Leases Part I

Hi Friends , Today I will take you through "IFRS 16 / SLFRS 16 - Leases" , the newest accounting standard which was introduced by IASB.

This is a very important standard to learn and understand it well because this will have a big impact to your Statement of Profit or Loss and Other Comprehensive Income and Statement of Financial Position (SOFP).

So without much explanations, let's begin the journey through IFRS 16 / SLFRS16 - Leases



You know companies such as Air Line Companies have most of their air crafts on Operating lease basis. which means no such assets have have been recognized in the balance sheet. Because of this scenario you will notice that such company's Asset Turnover Ratio is very High.

One of the main reason for introducing IFRS 16 / SLFRS 16 - Leases standard by IASB is the above fact.

This standard was jointly developed by IASB and FASB.

Operating Lease vs Finance Lease Classification

You might remember one of the main area in LKAS 17 was the classification test to categorize a lease contract in to either of Finance lease ( On Balance Sheet) or Operating Lease ( Off Balance Sheet).

However in IFRS 16 / SLFRS 16 , this classification test has been removed.

What is the effective date of IFRS 16 / SLFRS 16

Thus companies with financial years ending 31st December 2019 and 31st March 2020 will be implementing IFRS 16 / SLFRS 16 for the first time.

Scope of SLFRS 16/ IFRS 16 - Leases


Exemptions given by the standard

You know that SLFRS 16/IFRS 16 - leases have so many changes compared to LKAS 17/ IAS 17. However almost all the changes are relating to Lessee accounting and Lessor accounting remains the same as LKAS 17/ IAS 17.

Further SLFRS 16/IFRS 16 - leases gives some exemptions to lessee accounting as follows.

1. Short Term Leases (<12 Months and No purchase Option)
2. Low Value Leases

If you decide to apply your lease contract under above exemptions, they you can recognise the lease payments as an expense on either a straight-line basis over the lease term or another systematic basis.

However above exemption options are not applicable for Lessors.

Application of Lease Definition

IAS 17 / LKAS 17 Definition - " A lease is an agreement whereby the lessor conveys to the lessee in return for a payment or series of payments the right to use an asset for an agreed period of time"

IFRS 16 / SLFRS 16 Definition - "A contract, or part of a contract, that conveys the right to use an asset (the underlying asset) for a period of time in exchange for consideration."

Step 01 - Determine Whether Your "Contract" Contain a Lease or Not


As the first step of applying SLFRS 16 - Leases in your company , you are required to assess your Contracts as to whether they contain a "Lease" or not.

For this you can refer to Paragraphs B9–B31 of the standard. However we have summarized the requirements as follows.

Let's discuss each of above separately. All above 3 major criteria need to be met to conclude a contract is having a lease or not.

How to decide Identified Asset or Not ?

You have to look at two things in deciding whether the asset being considered can be taken as a identified asset as per SLFRS 16/IFRS 16.

1. Substantive Substitution Rights (Para B13 to B19)


2. Capacity Portion of the asset (Para B20)


How to decide Whether Lessee is having Right to obtain substantially all the economic benefits ?

To control the asset, Lessee should be able to obtain substantially all of the economic benefits from use of the asset throughout the period . (Para B21 to B23)

A lessee can obtain economic benefits from the use of an asset a asset directly or indirectly in many ways.

• Using
• Holding
• Sub Leasing

As per the standard, all economic benefits consists of two things;

1. Main output from the asset and by-products
2. Other benefits from commercial transaction with third party

Eg: If the lease contract limits the lessee driving the vehicle only in Western Province, lessee shall consider economic benefits that can be obtained from driving only in western province.

How to decide Whether Lessee directs the use ?
Next Parts will cover the remaining as follows;

SLFRS 16 / IFRS 16 - Leases Part II - Lessee Accounting
SLFRS 16 / IFRS 16 - Leases Part III - Lessor Accounting
SLFRS 16 / IFRS 16 - Leases Part IV - Transitional Accounting

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References and Sources used to Write the Article

IFRS 16 Leases
SLFRS 16 Leases
KPMG Insight into IFRS

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Article Written By : H.Harshana Sameeraka ( Bsc Accounting (Special) First Class (Gold Medal Winner), CA Passed Finalist with pending Viva(Prize Winner), Reading For CIMA SCS, Audit Supervisor KPMG)
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