LEASE TERM IFRS 16

IFRS 16 requires lessors to classify leases as either an “operating lease” or a “financing lease.”The lessor recognizes revenue under a financing lease as essentially interest payments on the amount financed. The lessor recognizes income under an operating lease on a systematic consistent with the benefits derived from the leased assets, which may be a straight-line basis.

IFRS 16 was developed in collaboration with the Financial Accounting Standards Board (FASB) in the United States, but while the new FASB leasing standard will share many common features with IFRS 16, such as reporting all large leases on the balance sheet, there will be some significant differences between the two standards.

According to IASB chairman Hans Hoogervorst, “These new accounting requirements bring lease accounting into the 21st century, ending the guesswork involved when calculating a company’s often-substantial lease obligation. The new standard will provide much-needed transparency on companies’ lease assets and liabilities, meaning that off balance sheet lease financing is no longer lurking in the shadows. It will also improve comparability between companies that lease and those that borrow to buy.”

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