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    Significant Changes Under IFRS 16 - Leases - 1555848067

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    anver2679
    IFRS 16 introduces significant changes to lessee accounting by requiring companies to recognize assets and liabilities for all leases with a term of more than 12 months. It eliminates the classification of leases as either operating leases or finance leases and instead treats all leases as finance leases. As a result, leases will be "capitalized" by recognizing the present value of the lease payments as lease assets and liabilities on the balance sheet. On the income statement, the straight-line operating lease expense is replaced with a depreciation charge and interest expense, resulting in higher initial costs that decrease over the lease term. The new standard affects all companies using off-balance sheet lease financing.

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    Significant Changes Under IFRS 16 - Leases - 1555848067

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    anver2679
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    IFRS 16 introduces significant changes to lessee accounting by requiring companies to recognize assets and liabilities for all leases with a term of more than 12 months. It eliminates the classification of leases as either operating leases or finance leases and instead treats all leases as finance leases. As a result, leases will be "capitalized" by recognizing the present value of the lease payments as lease assets and liabilities on the balance sheet. On the income statement, the straight-line operating lease expense is replaced with a depreciation charge and interest expense, resulting in higher initial costs that decrease over the lease term. The new standard affects all companies using off-balance sheet lease financing.

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    Significant Changes Under IFRS 16 - Leases_1555848067

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    IFRS 16 introduces significant changes to lessee accounting by requiring companies to recognize assets and liabilities for all leases with a term of more than 12 months. It eliminates the classification of leases as either operating leases or finance leases and instead treats all leases as finance leases. As a result, leases will be "capitalized" by recognizing the present value of the lease payments as lease assets and liabilities on the balance sheet. On the income statement, the straight-line operating lease expense is replaced with a depreciation charge and interest expense, resulting in higher initial costs that decrease over the lease term. The new standard affects all companies using off-balance sheet lease financing.

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    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    26 views2 pages

    Significant Changes Under IFRS 16 - Leases - 1555848067

    Uploaded by

    anver2679
    IFRS 16 introduces significant changes to lessee accounting by requiring companies to recognize assets and liabilities for all leases with a term of more than 12 months. It eliminates the classification of leases as either operating leases or finance leases and instead treats all leases as finance leases. As a result, leases will be "capitalized" by recognizing the present value of the lease payments as lease assets and liabilities on the balance sheet. On the income statement, the straight-line operating lease expense is replaced with a depreciation charge and interest expense, resulting in higher initial costs that decrease over the lease term. The new standard affects all companies using off-balance sheet lease financing.

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    Significant changes under IFRS 16 - Leases

    Previous lessee accounting - IAS 17 was focused on identifying when a lease was economically
    similar to purchasing the asset being leased.
    When a lease was determined to be economically similar to purchasing the leased asset, it was
    classified as a finance lease and reported on a company’s balance sheet.
    All other leases were classified as operating leases, not reported on a company’s balance sheet
    (‘off balance sheet leases’), and were accounted for similarly to service contracts, with the
    company reporting a rental expense in the income statement (‘straight-line lease expense’).

    Identifying a lease under IFRS 16


    At inception of a contract, an entity shall assess whether the contract is, or contains, a lease.
    A contract is, or contains, a lease if the contract conveys the right to control the use of an
    identified asset for a period of time in exchange for consideration (‘cash payments/ lease
    payments / rental payments’).

    What changes in a company’s balance sheet (lessee accounting)?


    IFRS 16 eliminates the classification of leases as either operating leases or finance leases for a
    lessee.
    Instead, all leases are treated in a similar way to finance leases applying IAS 17. Leases are
    ‘capitalised’ by recognizing the present value of the lease payments and showing them either
    as lease assets (right-of-use assets) or together with property, plant, and equipment.
    If lease payments are made over time, a company also recognizes a financial liability
    representing its obligation to make future lease payments.
    Significant changes under IFRS 16 - Leases
    What does IFRS 16 mean for a company’s income statement?

    IFRS 16 changes the nature of expenses related to leases and replaces


    the straight-line operating lease expense (IAS 17) with a depreciation
    charge for the leased asset (included within operating costs) and an
    interest expense on the lease liability (included within finance costs).
    This change aligns the lease expense treatment for all leases.
    Although the depreciation charge is typically even, the interest expense
    reduces over the life of the lease as lease payments are made. This
    results in a reduction of total cost as an individual lease contract
    matures.

    The company recognizes more lease expenses (depreciation plus


    finance costs) at the beginning, and it reduces over time as the contract
    lease matures.

    Who will be affected by the changes?


    Off balance sheet lease financing numbers are substantial and impact all
    industries and business.

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