IFRS 16: Introduction & Key Changes
IFRS 16 brought one of the biggest changes to the balance sheet in decades. It eliminated "off-balance sheet" financing for lessees.
1Why was IAS 17 replaced?
Under the old standard (IAS 17), companies could classify leases as "operating leases." This meant billions in future payment obligations were hidden in the footnotes rather than shown as debt on the balance sheet.
The Result?
Investors had to "add back" these hidden debts to get a true picture of a company's gearing (leverage). IFRS 16 solved this by requiring almost all leases to be recognized on the SOFP.
2The Single Lessee Model
This is the most critical change. Except for very specific exemptions, a lessee no longer distinguishes between 'finance' and 'operating' leases.
The Asset
Right-of-Use (ROU) Asset
Representing the right to use the underlying asset.
The Liability
Lease Liability
Representing the obligation to make lease payments.
Lessor Accounting: Interestingly, for lessors, the old IAS 17 model remains largely the same. They still distinguish between operating and finance leases.
3Is it actually a Lease?
A contract is, or contains, a lease if it conveys the right to control the use of an identified asset for a period of time in exchange for consideration.
Identified Asset
The asset must be explicitly or implicitly specified. If the supplier has substantive substitution rights, it is not an identified asset.
Control
The customer must have the right to obtain substantially all economic benefits and the right to direct the use of the asset.
4The "Escape Clauses" (Exemptions)
You can choose NOT to apply the ROU model for:
Short-Term Leases
12 months or less, with no purchase option.
Low-Value Assets
Think tablets, office furniture, or small IT equipment (typically < $5,000 when new).
Coming Up Next
In Part 2, we will master the technical mechanics: how to calculate the initial value of that Lease Liability and the ROU Asset.