IFRS 16 Leases vs. IAS 17 Leases: Understanding the Changes in Lease Accounting

Leasing is a common practice in the business world, with companies often opting to lease assets rather than buying them outright. In the past, the International Accounting Standards (IAS) 17 provided guidance on how to account for lease transactions. However, with the introduction of the International Financial Reporting Standard (IFRS) 16, significant changes were made to the lease accounting process. In this blog post, we'll explore the differences between IFRS 16 Leases and IAS 17 Leases and how the lease accounting process has changed.

What is IAS 17 Leases?

IAS 17 is the previous accounting standard for leases, which provided guidance on how to account for lease transactions. Under IAS 17, leases were classified as either finance leases or operating leases. Finance leases were treated like purchases and resulted in the asset being recorded on the balance sheet, while operating leases were treated like rentals and did not result in the asset being recorded on the balance sheet.

What is IFRS 16 Leases?

IFRS 16 is the current accounting standard for leases, which replaces IAS 17. The most significant change introduced by IFRS 16 is the requirement to recognize all lease liabilities and lease assets on the balance sheet. This means that both finance leases and operating leases are now recognized as assets and liabilities on the balance sheet.

What are the main differences between IFRS 16 Leases and IAS 17 Leases?

Under IAS 17, companies were only required to disclose operating lease commitments in the notes to the financial statements. However, under IFRS 16, companies are required to recognize all lease liabilities and lease assets on the balance sheet. This change is significant as it provides a more accurate reflection of a company's financial position and increases transparency.

Another difference between IFRS 16 and IAS 17 is the way in which lease payments are recognized. Under IAS 17, lease payments were recognized as an expense in the income statement over the term of the lease. However, under IFRS 16, lease payments are split into two parts: the lease liability and the interest expense. The lease liability is recognized on the balance sheet, while the interest expense is recognized in the income statement.

How has lease accounting changed under IFRS 16?

Under IFRS 16, all leases are now recognized as assets and liabilities on the balance sheet, regardless of whether they are finance leases or operating leases. This means that companies will need to recognize the present value of lease payments as a liability on the balance sheet, along with a corresponding asset that represents the right to use the leased asset. This change will impact a company's financial ratios, such as debt-to-equity ratio and return on assets.

Finally, the introduction of IFRS 16 has significantly changed the lease accounting process, requiring companies to recognize all lease liabilities and assets on the balance sheet. This change has increased transparency and accuracy in financial reporting. Companies need to be aware of the new requirements under IFRS 16 and make the necessary adjustments to their financial reporting processes to ensure compliance with the new standard.