Month End Glossary

IFRS - 16 Leases

IFRS 16 - Leases is a standard issued by the IASB that specifies how an entity recognizes, measures, presents, and discloses leases.

IFRS 16 - Leases is an International Financial Reporting Standard (IFRS) introduced by the International Accounting Standards Board (IASB). Its primary aim is to introduce a single lessee accounting model for leases, whereby lessees are required to recognize assets and liabilities for most lease arrangements. Unlike older standards like IAS 17, IFRS 16 eliminates the distinction between operating leases and finance leases on the lessee's balance sheet.

Under IFRS 16, a lessee recognizes a right-of-use (ROU) asset and a lease liability at the commencement of a lease. The ROU asset represents the lessee's right to use the leased asset over the lease term, while the lease liability captures the present value of lease payments. For example, if a company leases office space, they must record the office space as an ROU asset and the corresponding lease payments as a liability in their financial statements.

This standard helps increase transparency by showing the actual financial obligations of entities and providing greater comparability for investors and stakeholders. However, for leases with a lease term of 12 months or less or for low-value assets, lessees may elect not to apply the recognition requirements, treating them similar to operating leases in older standards.

IFRS 16 is relevant for businesses engaging in leasing arrangements and affects their financial statements’ preparation, specifically the balance sheet and income statement. For instance, when reconciling account balances using tools like Easy Month End, one must consider the impact of IFRS 16 on balance sheet reconciliations and reporting.

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