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The new standard on lease accounting (IFRS 16) was issued in January 2016 with major changes, of which the most significant are the following:

  • The new definition of the lease can cause that some contracts previously treated as “service contracts” can now be treated as “lease contracts”; and
  • 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.

Why the change?

The main reason for the change was that companies were able to hide some liabilities resulting from leases through IAS 17 in the past, especially in operating leases.  The information was then hidden in the notes to the financial statements.

What is a lease under the new IFRS 16?

IFRS 16.9 determines that 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.

A few questions to consider if you have a lease:

  • Can the asset be identified?
  • Can the customer decide about the asset’s use?
  • Can the customer get the economic benefit from the use of that asset?
  • Can the supplier substitute the asset during the period of use?

The lease also needs to be separated into lease and non-lease components.  For example, if you rent an office and the rental payments include fees for cleaning services, the payments should be separated into the two components, namely the lease and service payments.  These need to be accounted for separately.

The second big change is that lessees do not need to classify the lease at inception to determine whether it is a finance or operating lease.  IFRS 16 has a single model of accounting for every lease for the lessees.  In short:

  • A right-of-use asset and corresponding liability needs to be recognised; and
  • The asset shall be depreciated and the liability amortised over the lease period.

There are however two exemptions to this rule:

  • Lease of assets for less than 12 months (short-term leases), and
  • Lease of assets of low value (such as computers, furniture etc.).

Kindly note that this is only applicable to entities that use full IFRS to compile their financial statements.  Should you as a valued client use IFRS for SME’s to compile your financial statements, the above does not yet apply.

If you have any further questions on this topic, you are welcome to contact Retha van Blommestein (retha@asl.co.za) or your relationship director.

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