Why the IFRS 16 leases standard?

In January 2016, the new standard about lease accounting IFRS 16 was issued and it introduced a few major changes. The most significant are:

  1. A new definition of the lease can cause that some contracts previously treated as “service contracts” can now be treated as “lease contracts”,
  2. Accounting for leases in the lessee’s financial statements changed and lessees do not classify the lease anymore. Instead, they should account for all the leases in the same way.

However, in Uganda, the Central Bank issued an instruction circular on 20th February 2019 requiring Supervised Financial Institutions on the implementation of the standard.

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Why IFRS 16 Leases?

The objective of the standard IFRS 16 Leases is to specify the rules for recognition, measurement, presentation, and disclosure of leases.

At a client presentation, the CFO asked; “But, why is there a new lease standard when we had an older IAS 17.”

Read: IFRS9 Implementation instruments made easy

Our response “the main reason is that under IAS 17, lessees were still able to hide certain liabilities resulting from leases and simply not present them on the face of the financial statements”

I’m talking about operating leases, especially those with non-cancellable terms.

Under the new standard, lessees will need to show all the leases right in their statement of financial position instead of hiding them in the notes to the financial statements.

What is a lease under IFRS 16?

A contract is or contains a lease if it conveys the right to control the use of an identified asset for a period of time in exchange for consideration (IFRS16, par.9).

For more guidance on IFRS 16 leases, click here to download an IFRS 16 model

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