Implications of IFRS 16
IFRS 16 changed lease accounting rules for every business. Companies must follow new guidelines for recording leases. Mubarak Al Ketbi (MAK) Auditing helps you understand these changes and apply the standard correctly.
What Is IFRS 16?
IFRS 16 is the new international standard for lease accounting. The rule replaced the old standard IAS 17 in 2019. IFRS 16 gives more transparency and uniformity to financial statements. Now companies must show more lease assets and liabilities on their balance sheets.
Major Changes in Lease Accounting under IFRS 16
IFRS 16 removed the old split between finance leases and operating leases. Now every lease, except for a few exceptions, must be shown as a right-of-use asset and a lease liability.
When a company signs a lease:
- It records a right-of-use asset on the balance sheet.
- It records a lease liability for payment obligations.
- Depreciation and interest expense show up in the income statement.
- Most leases appear “on-balance sheet” for lessees, making financial statements clearer.
For lessors, the changes are minor, and most old rules remain.
What Are the Exceptions in IFRS 16?
IFRS 16 lets companies ignore some small or short-term leases. These exceptions include:
- Leases for assets worth less than US$ 5,000 (when new):
- Example: printers, laptops, or small office equipment.
- Companies do not need to record these on the balance sheet.
- Short-term leases under 12 months:
- No purchase option at the end.
- Only the lease payments are recorded as expenses.
For these leases, you can record payments straight into the income statement, using the straight-line method or another pattern that fits asset use.
Key Factors in Lease Accounting with IFRS 16
Companies must think about these points:
- Present value of future lease payments:
Use the incremental borrowing rate to calculate this. - How to pick the incremental borrowing rate:
Consider the interest rate on similar loans, discount rates, or your company’s debt profile. - Depreciation method:
Usually, companies use straight-line depreciation for right-of-use assets. - Interest expenses:
These are higher in early years but total lease cost stays the same as old rules. - Changes or terminations:
IFRS 16 gives guidance for amending or ending lease contracts.
Always talk to an accounting expert like Mubarak Al Ketbi (MAK) Auditing for detailed lease schedules and compliance.
Bullet Points: How to Stay Compliant
- Review every lease contract for IFRS 16 rules.
- Identify assets and liabilities for each lease.
- Calculate present values using correct rates.
- Use proper depreciation methods for assets.
- Update your financial statements on time.
For more information:
- Visit our office: Saraya Avenue Building – Office M-06, Block/A, Al Garhoud – Dubai – United Arab Emirates
- Or contact/WhatsApp: +971 50 276 2132
