Lessee accounting under IFRS 16

Lessee accounting under IFRS 16

The key objective of IFRS 16 is to ensure that lessees recognise assets and liabilities for their major leases.

1. Lessee accounting model

A lessee applies a single lease accounting model under which it recognises all leases on-balance sheet, unless it elects to apply the recognition exemptions (see recognition exemptions for lessees in the link). A lessee recognises a right-of-use asset representing its right to use the underlying asset and a lease liability representing its obligation to make payments. [IFRS 16.22]

[IFRS 16.47, IFRS 16.49]

IFRS 16 Balance sheet Profit or loss

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Sub-leases under IFRS 16

Sub-leases under IFRS 16

The classification guidance in IFRS 16 means that many sub-leases are finance leases, impacting the financial position and financial performance of intermediate lessors.

A sub-lease is a transaction in which a lessee (or ‘intermediate lessor’) grants a right to use the underlying asset to a third party, and the lease (or ‘head lease’) between the original lessor and lessee remains in effect.

A company applies IFRS 16 to all leases of right-of-use assets in a sub-lease. The intermediate lessor accounts for the head lease and the sub-lease as two different contracts, applying both the lessee and lessor accounting requirements. [IFRS 16.3]

Sub-leases under IFRS 16

An intermediate lessor classifies the sub-lease as a finance lease or as an operating lease with reference to the right-of-use asset arising from the head lease. That is, the intermediate lessor treats the right-of-use asset as the underlying asset in the sub-lease, not the item of property, plant or equipment that it leases from the head lessor. [IFRS 16.B58]

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Financing activities

Financing activities - Activities that result in changes in the size and composition of the contributed capital and borrowings of the entity.

IFRS 16 Modification short-term lease

IFRS 16 Modification short-term lease – The life of a short-term lease

The lease term

It all starts with determining the lease term on the commencement date of the lease. A short-term lease must have a lease term of 12 months or less determined on the commencement date. Furthermore, it must not contain any purchase options – if it does, it automatically fails the short-term lease definition.

The lease term comprises the non-cancellable period of a lease together with periods covered by an option to extend (terminate) the lease if the lessee is reasonably certain (not) to exercise that option. The relationship between the non-cancellable period, lease term, and enforceable period of a lease can be illustrated as follows:

Enforceable

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