Question

IFRS 16 Leases has changed how leases will be recognized in financial statements. Outline the key changes to lease accounting contained in IFRS 16 and discuss why these changes were considered to be needed.

(Word Limit: 150)

Answer 1

It is very important to note that IAS 17 has been replaced with IFRS 16.

Key changes are:

1. Under IAS 17, operating leases off balance sheet are treated as single expense. Finance leases on balance sheet. Under IFRS 16, operating leases to report depreciation and interest seperately and recognise asset and liabillity on balance sheet.

Reason: Improves clearity and shows more tru and view (transparency). Users can see effect of operating leases and can compare with other companies.

2. Under IAS 17, the accounting treatment of operating lease is less complicated as compared to finance lease. Under IFRS 16, there is no idfferent treatment to operating or finance lease.

Reason: Since operating leases need not appear in Balance sheet, the professionals has comparatively easier job.

3. Formerly, there was a classification of leases as either operating leases or finance leases. This classification has been eliminated in the current standard i.e. IFRS 16. It requires disclosure of the right to use assets and liabilities.

Reason: Since all the leases are recognised in Balance sheet, no seperate disclosure is required.

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