IFRS 16, effective from 1 January 2019, fundamentally changed how lessees account for leases by introducing a single on-balance-sheet model, eliminating the previous distinction between operating and finance leases for lessees (with limited exemptions).

---

Lessee Accounting – Core Model

At the commencement date, a lessee must recognise:

• A right-of-use (ROU) asset – representing the lessee's right to use the underlying asset
• A lease liability – representing the obligation to make lease payments

The lease liability is initially measured at the present value of future lease payments not paid at commencement, discounted using the interest rate implicit in the lease, or if that cannot be readily determined, the lessee's incremental borrowing rate (IFRS 16.26).

Lease payments included in the measurement are (IFRS 16.27):

• Fixed payments (less any lease incentives receivable)
• Variable lease payments that depend on an index or rate
• Exercise price of a purchase option (if reasonably certain to exercise)
• Payments for penalties for terminating the lease (if the lease term reflects exercise of a termination option)

The ROU asset is initially measured at the lease liability amount, plus any initial direct costs, prepayments made, and estimated costs of dismantling/restoring the asset (IFRS 16.24).

---

Subsequent Measurement

After commencement:

• The lease liability is increased for interest accrued (using the effective interest method) and reduced by lease payments made (IFRS 16.36)
• The ROU asset is depreciated on a straight-line basis (or another systematic basis) over the shorter of the lease term or the asset's useful life, unless ownership transfers or a purchase option is reasonably certain to be exercised (IFRS 16.31)
• The ROU asset is also subject to impairment testing under IAS 36

---

Exemptions Available to Lessees

Lessees may elect not to apply the recognition model to (IFRS 16.5):

• Short-term leases – leases with a term of 12 months or less at commencement
• Low-value asset leases – individually valued assets with a value of approximately USD 5,000 or below when new

Payments for these leases are recognised as an expense on a straight-line basis or another systematic basis.

---

Lessor Accounting

Lessor accounting under IFRS 16 remains broadly unchanged from IAS 17. Lessors classify leases as either:

• Finance leases – where substantially all risks and rewards of ownership transfer to the lessee (IFRS 16.62); the lessor derecognises the asset and recognises a receivable
• Operating leases – all other leases; lease income is recognised on a straight-line basis (IFRS 16.81)

---

Key Disclosures

Entities must provide disclosures enabling users to assess the effect of leases on financial position, performance, and cash flows (IFRS 16.51), including maturity analyses of lease liabilities and a depreciation charge breakdown by class of ROU asset.

---

Practical Implications

IFRS 16 significantly impacts key financial metrics – EBITDA improves (lease expense replaced by depreciation and interest), while gearing ratios and debt levels increase. Companies in retail, aviation, and shipping sectors are particularly affected.