IFRS 16 Leases - Department of Trade and Industry

1 International Financial Reporting Standard January 2016 ifrs 16 LeasesInternational Financial ReportingStandard 16 LeasesIFRS 16 Leasesis issued by the International Accounting Standards Board (IASB).Disclaimer:the IASB, the ifrs Foundation, the authors and the publishers do not accept responsibilityfor any loss caused by acting or refraining from acting in reliance on the material in this publication,whether such loss is caused by negligence or Financial Reporting Standards (including International Accounting Standards and SIC andIFRIC Interpretations), Exposure Drafts and other IASB and/or ifrs Foundation publications arecopyright of the ifrs 2016 ifrs Foundation ISBN for this part: 978-1-911040-04-0; ISBN for set of three parts: 978-1-911040-03-3 All rights part of this publication may be translated, reprinted, reproduced or used inany form either in whole or in part or by any electronic, mechanical or other means, now known orhereafter invented, including photocopying and recording, or in any information storage and retrievalsystem, without prior permission in writing from the ifrs approved text of International Financial Reporting Standards and other IASB publications is thatpublished by the IASB in the English language.

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3 FC023235) with its principal office as FINANCIAL REPORTING STANDARD 16 LEASESINTRODUCTIONOBJECTIVE1 SCOPE3 RECOGNITION EXEMPTIONS5 IDENTIFYING A LEASE9 Separating components of a contract12 Lessee13 Lessor17 lease TERM18 LESSEE22 Recognition22 Measurement22 Initial measurement23 Subsequent measurement29 Presentation47 Disclosure51 LESSOR61 Classification of leases61 Finance leases67 Recognition and measurement67 Operating leases81 Recognition and measurement81 Presentation88 Disclosure89 Finance leases93 Operating leases95 SALE AND LEASEBACK TRANSACTIONS98 Assessing whether the transfer of the asset is a sale99 Transfer of the asset is a sale100 Transfer of the asset is not a sale103 APPENDICESA Defined termsB Application

4 GuidanceC Effective date and transitionD Amendments to other StandardsAPPROVAL BY THE BOARD OF ifrs 16 LEASESISSUED IN JANUARY 2016 BASIS FOR CONCLUSIONS ON ifrs 16 Leases (see separate booklet)INTERNATIONALFINANCIALREPORTINGS TANDARD ifrs Foundation3 DISSENTING OPINIONAPPENDIXA mendments to the Basis for Conclusions on other StandardsILLUSTRATIVE EXAMPLES (see separate booklet)APPENDIXA mendments to guidance on other StandardsIFRS 16 Leases JANUARY2016 ifrs Foundation4 International Financial Reporting Standard 16 Leases ( ifrs 16) is set out in paragraphs1 103 and Appendices A D. All the paragraphs have equal authority. Paragraphs inbold typestate the main principles. Terms defined in Appendix A are initalicsthe firsttime that they appear in the Standard.

5 Definitions of other terms are given in theGlossary for International Financial Reporting Standards. The Standard should be readin the context of its objective and the Basis for Conclusions, thePreface to InternationalFinancial Reporting Standardsand theConceptual Framework for Financial Reporting. IAS 8 Accounting Policies, Changes in Accounting Estimates and Errorsprovides a basis for selectingand applying accounting policies in the absence of explicit ifrs Foundation5 IntroductionOverviewIN1 International Financial Reporting Standard 16 Leases ( ifrs 16) sets out theprinciples for the recognition, measurement, presentation and disclosure ofleases. The objective is to ensure that lessees and lessors provide relevantinformation in a manner that faithfully represents those transactions.

6 Thisinformation gives a basis for users of financial statements to assess the effectthat Leases have on the financial position, financial performance and cash flowsof the 16 is effective for annual periods beginning on or after 1 January application is permitted for entities that apply ifrs 15 Revenue fromContracts with Customersat or before the date of initial application of ifrs 16 supersedes:(a)IAS 17 Leases ;(b)IFRIC 4 Determining whether an Arrangement contains a lease ;(c)SIC-15 Operating Leases Incentives; and(d)SIC-27 Evaluating the Substance of Transactions Involving the Legal Form of for issuing ifrs 16IN4 Leasing is an important activity for many entities. It is a means of gaining accessto assets, of obtaining finance and of reducing an entity s exposure to the risksof asset ownership.

7 The prevalence of leasing means that it is important thatusers of financial statements have a complete and understandable picture of anentity s leasing previous accounting model for Leases required lessees and lessors to classifytheir Leases as either finance Leases or operating Leases and account for those twotypes of Leases differently. That model was criticised for failing to meet theneeds of users of financial statements because it did not always provide afaithful representation of leasing transactions. In particular, it did not requirelessees to recognise assets and liabilities arising from operating , the International Accounting Standards Board (IASB) and the USnational standard-setter, the Financial Accounting Standards Board (FASB),initiated a joint project to develop a new approach to lease accounting thatrequires a lessee to recognise assets and liabilities for the rights and obligationscreated by Leases .

8 This approach will result in a more faithful representation ofa lessee s assets and liabilities and, together with enhanced disclosures, willprovide greater transparency of a lessee s financial leverage and 16 Leases JANUARY2016 ifrs Foundation6IN7 Both Boards decided that a lessee should be required to recognise assets andliabilities for all Leases (with limited exceptions), and both Boards have definedleases in the same way. The Boards reached similar decisions regarding themeasurement of lease liabilities, and how to account for Leases that wereformerly classified as finance Leases . In addition, both Boards decided not tosubstantially change lessor , the Boards reached different decisions for Leases that were formerlyclassified as operating Leases with respect to the recognition of lease expensesand the reporting of lease -related cash flows.

9 The IASB decided to adopt a singlelessee accounting model whereby a lessee accounts for all Leases in the sameway. The FASB decided to adopt a dual lessee accounting model, classifyingleases in a similar manner to the previous requirements in US GenerallyAccepted Accounting Principles (US GAAP) for distinguishing between operatingleases and capital Leases , and to account for those two types of Leases 16 completes the IASB s project to improve the financial reporting of featuresLessee accountingIN10 ifrs 16 introduces a single lessee accounting model and requires a lessee torecognise assets and liabilities for all Leases with a term of more than 12 months,unless the underlying asset is of low value. A lessee is required to recognise aright-of-use asset representing its right to use the underlying leased asset and alease liability representing its obligation to make lease lessee measures right-of-use assets similarly to other non-financial assets (suchas property, plant and equipment) and lease liabilities similarly to otherfinancial liabilities.

10 As a consequence, a lessee recognises depreciation of theright-of-use asset and interest on the lease liability, and also classifies cashrepayments of the lease liability into a principal portion and an interest portionand presents them in the statement of cash flows applying IAS 7 Statement of and liabilities arising from a lease are initially measured on a presentvalue basis. The measurement includes non-cancellable lease payments(including inflation-linked payments), and also includes payments to be made inoptional periods if the lessee is reasonably certain to exercise an option toextend the lease , or not to exercise an option to terminate the 16 contains disclosure requirements for lessees. Lessees will need to applyjudgement in deciding upon the information to disclose to meet the objective ofproviding a basis for users of financial statements to assess the effect that leaseshave on the financial position, financial performance and cash flows of accountingIN14 ifrs 16 substantially carries forward the lessor accounting requirements inIAS 17.