IFRS 16 - Leases and Its Implementation

IFRS 16 is a global accounting standard introduced by the International Accounting Standards Board (IASB) that has transformed lease accounting. Effective from January 1, 2019, IFRS 16 replaced IAS 17 with the objective of enhancing transparency and comparability in financial statements. The key change is that it requires most leases to be reported on the balance sheet, giving stakeholders a clearer picture of an organization’s financial obligations.

IFRS 16 introduces a unified model for lease accounting that eliminates the distinction between operating and finance leases for lessees, which was a hallmark of IAS 17. Under this new standard, lessees must recognize nearly all leases on their balance sheets, recording both a right-of-use asset and a corresponding lease liability. This model ensures that lease commitments are no longer hidden off-balance-sheet and provides a more accurate reflection of a company's financial position.

A lease is defined as a contract that provides the right to use an asset—such as property or equipment—for a specific period in return for payment. The right-of-use asset represents the lessee’s right to use the leased item over the lease term. Correspondingly, the lease liability is the lessee’s obligation to make lease payments, which is calculated at the present value of future lease payments using a discount rate , typically the lessee’s borrowing rate. The lessor is the party granting the use of the asset, while the lessee is the party acquiring the right to use it.