Lease Arrangements - A Significant Shift For Lessees – IFRS 16

Protiviti_IFRS 16 Accounting for Financial Instruments

Lease Arrangements - A Significant Shift For Lessees – IFRS 16


Lease arrangements have existed for decades and have evolved over the years. Increase in innovative ways to structure business arrangements has kept accounting regulators busy with reforming the accounting rules to reflect the real substance of the arrangement.


Leasing of assets has been a strategy for the user of the asset to avoid blocking of their funds in assets and also maximise tax benefits available. For example, many companies provide incentive to its employees by way of vehicles on operating lease and pass on the tax benefit by charging lease expense in the income statement.

Lease accounting has been under discussion between the global accounting bodies (IASB and FASB) for quite some time. The two bodies have jointly been evaluating the existing accounting treatment for lease arrangements, in particular, by lessee or the user of the asset.

In January 2016, the International Accounting Standard Board (IASB) issued IFRS 16 Leases – effective from annual periods beginning on or after 1st January 2019 with early adoption permitted under certain circumstances. The new standard replaces the existing guidance on leases i.e. IAS 17, IFRIC 4, SIC-15 and SIC 27. Correspondingly, FASB issued the IFRS 16 equivalent (ASC 842) in February 2016. There are some differences in the application of the two standards but largely these are similar in substance, in particular, with respect to the principle of recording the ‘Right-of-use’ assets on the balance sheet, in case of operating leases, by the lessee.

The effects of IFRS 16 will be pervasive across all sectors. According to the effect analysis of new lease standard issued by the IASB, over 14,000 listed companies (out of 30,000 listed Companies surveyed across all regions) disclose information about off balance sheet leases in their annual reports. Also, the IASB compared off-balance sheet leases to the total assets of about 1,022 companies. The analysis showed that present value of future payments for off balance sheet leases is approximately 5.4% (USD 1.66 trillion) of total assets. Major impact is for airlines, retail and travel sector where these payments constitutes above 20% of total assets. Other sectors significantly impacted are transport, telecommunication, media and energy (oil, gas and mining).

This publication briefly discusses the key accounting changes under new standard and also how it is likely to impact businesses as a whole, including the transition provisions.