Landlord accounting model
Landlords continue to classify leases as finance or operating leases, and continue to classify many real estate leases as operating leases.
The lessor follows a dual accounting approach for lease accounting. The accounting is based on whether significant risks and rewards incidental to ownership of an underlying asset are transferred to the lessee, in which case the lease is classified as a finance lease. This is similar to the previous lease accounting requirements that applied to lessors.
What are the impacts of IFRS 16 on lessors?
Much of the guidance in IFRS 16 on lessor accounting is a ‘carry forward’ from IAS 17 Leases – literally a cut-and-paste. This reflects feedback from financial statement users and other stakeholders that lessor accounting was not ‘broken’.
However, there are a number of changes in the details of lessor accounting. For example, lessors apply the new:
The same definition of ‘lease term’ applies to both lessees and lessors. IFRS 16 includes guidance on when extension options and termination options are taken into consideration when determining the lease term. Additional guidance has been issued about determining the lease term – an estimate that could significantly impact the overall lease accounting.
In addition, IFRS 16 includes specific guidance on separating the components of a contract and accounting for lease modifications by lessors.
The new guidance may significantly impact the accounting for sub-leases and sale-and-leaseback transactions.