IAS 17 Vs IFRS 16 a concept that relates to LEASING. ´IAS 17´ is the International Accounting Standard (IAS) for leases that was issued by the International Accounting Standards Board (IASB) in 1982, while IFRS 16 is the new leasing standard that was issued by the IASB in 2016.
In-Depth Analysis
§ 01 — Background
Overview & Background
IAS 17 — Leases was the international accounting standard governing lease accounting from 2005 until it was superseded. Under IAS 17, lessees classified leases as either operating leases (off-balance-sheet) or finance leases (on-balance-sheet), based on whether “substantially all the risks and rewards” of ownership transferred to the lessee.
Critics consistently argued that the IAS 17 model allowed vast amounts of lease obligations to remain hidden off the balance sheet, producing financial statements that did not faithfully represent the economic reality of a company’s obligations. Analysts routinely added estimated lease values back to reported figures to compare businesses on a like-for-like basis.
In response, the International Accounting Standards Board (IASB) spent years developing a replacement. IFRS 16 — Leases was issued in January 2016 and became effective for annual periods beginning on or after 1 January 2019. It fundamentally reformed lessee accounting by requiring virtually all leases to be reflected on the balance sheet.
— IASB, IFRS 16 Basis for Conclusions
§ 02 — History
Historical Timeline
§ 03 — Conceptual Framework
Core Conceptual Difference
The most profound distinction IAS 17 Vs IFRS 16 is not merely technical, it represents a philosophical shift in how a lease is defined and what it gives rise to in financial statements.
IAS 17 Approach
Dual Classification Model
- Leases classified as finance or operating
- Classification driven by “substantially all risks and rewards” test
- Operating leases → off-balance-sheet for lessees
- Only finance leases recognised as asset + liability
- Straight-line expense for operating leases in P&L
IFRS 16 Approach
Single Lessee Model
- All leases (subject to exemptions) → on-balance-sheet
- Recognition of Right-of-Use (ROU) asset and lease liability
- No operating vs finance distinction for lessees
- Front-loaded P&L: depreciation + interest expense
- Lessor model largely unchanged from IAS 17
§ 04 — Lessee Accounting
Lessee Accounting: The Biggest Change
For lessees, the change from IAS 17 to IFRS 16 is transformative. Under IAS 17, the classification of a lease as operating or finance determined whether the obligation appeared on the balance sheet at all. Under IFRS 16, that distinction is abolished for lessees.
Recognition under IFRS 16
At the commencement date of a lease, a lessee must recognise:
- A Right-of-Use (ROU) asset representing the lessee’s right to use the underlying asset over the lease term
- A Lease liability representing the obligation to make lease payments, measured at the present value of future lease payments discounted at the interest rate implicit in the lease (or incremental borrowing rate)
Measurement of the Lease Liability
The lease liability includes the present value of: fixed payments, variable payments based on an index/rate, residual value guarantees, exercise prices of purchase options (if reasonably certain), and penalties for early termination (if reasonably certain). It is subsequently measured using the effective interest method.
Measurement of the ROU Asset
Initially measured at cost: the lease liability amount, plus any initial direct costs, plus lease payments made at/before commencement, less any lease incentives received. Subsequently measured under the cost model (depreciation + impairment) unless the revaluation model applies.
§ 05 — Lessor Accounting
Lessor Accounting: Largely Unchanged
A common misconception is that IFRS 16 overhauled accounting for both sides of a lease. In reality, lessor accounting under IFRS 16 is substantially similar to IAS 17. Lessors still classify leases as either finance leases or operating leases.
Operating Lease (Lessor)
IAS 17 & IFRS 16 — Same
- Asset remains on lessor’s balance sheet
- Rental income recognised on a straight-line basis
- Depreciation charged on the underlying asset
Finance Lease (Lessor)
IAS 17 & IFRS 16 — Same
- Lessor derecognises asset; recognises a receivable
- Receivable measured at net investment in the lease
- Finance income recognised using effective interest method
Notable addition in IFRS 16 for lessors: enhanced guidance on subleases (a sublease is classified by reference to the head-lease ROU asset, not the underlying asset) and on sale-and-leaseback transactions.
§ 06 — Side-by-Side
IAS 17 Vs IFRS 16 Comparison Table
| Aspect | IAS 17 | IFRS 16 |
|---|---|---|
| Effective Date | Annual periods from 1 Jan 2005 | Annual periods from 1 Jan 2019 |
| Lessee Model | Dual: Finance vs Operating lease | Single model: all leases on-balance-sheet |
| Balance Sheet (Lessee) | Only finance leases → asset + liability. Operating leases: off-balance-sheet. | All leases (excl. exemptions) → ROU asset + lease liability |
| P&L — Operating Lease | Straight-line rental expense (operating cost) | Depreciation of ROU asset + interest on liability (front-loaded) |
| P&L — Finance Lease | Depreciation + interest expense | Same: depreciation + interest expense |
| Lessor Model | Finance vs operating classification | Same dual classification retained |
| Lease Definition | Risks & rewards of ownership transfer | Control of an identified asset for a period of time |
| Short-Term Exemption | Not explicitly addressed | Leases ≤12 months may use simplified treatment |
| Low-Value Exemption | Not applicable | Assets with low underlying value (~US$5,000) may be exempted |
| Variable Lease Payments | Limited guidance | Detailed requirements; index-linked payments re-measured |
| Discount Rate | Rate implicit in lease (finance leases only) | Rate implicit in lease; or incremental borrowing rate |
| Lease Term | Non-cancellable period + renewals reasonably certain | Non-cancellable period + optional periods reasonably certain to exercise |
| Sale & Leaseback | Separate guidance, profit/loss recognition dependent on classification | Aligned with IFRS 15; only proportionate gain recognised by seller-lessee |
| Subleases | Classified by reference to underlying asset | Classified by reference to ROU asset |
| EBITDA Impact | Operating lease expense reduces EBITDA | Depreciation & interest below EBITDA → EBITDA increases |
| Disclosure | Operating lease commitments in notes only | Comprehensive disclosures: maturity analysis, ROU assets, cash flows |
| Supersedes | IAS 17 (1982 original) | IAS 17, IFRIC 4, SIC-15, SIC-27 |
§ 07 — Worked Examples
Journal Entry Examples
Consider a lessee entering a 5-year office lease with annual payments of $100,000. The incremental borrowing rate is 5%. The present value of lease payments ≈ $432,948.
Under IAS 17 — Operating Lease (Year 1)
No balance sheet impact. $100,000 straight-line expense each year. Total 5-year cost = $500,000.
Under IFRS 16 — Initial Recognition
Under IFRS 16 — Year 1 P&L Entries
Year 1 total P&L charge = $86,590 + $21,647 = $108,237 vs $100,000 under IAS 17. The front-loading is evident.
§ 08 — Financial Analysis
Impact on Financial Ratios & KPIs
The on-balance-sheet recognition of leases under IFRS 16 materially affects the financial ratios that analysts, investors, and lenders use to assess performance. Understanding these changes is critical for comparing pre- and post-IFRS 16 periods and for cross-company analysis.
§ 09 — Practical Exemptions
Practical Exemptions Under IFRS 16
IFRS 16 introduced two practical expedients allowing lessees to opt out of full on-balance-sheet recognition. These are elected by class of underlying asset and applied consistently.
1. Short-Term Lease Exemption
A lessee may elect not to apply IFRS 16 recognition requirements to leases with a lease term of 12 months or less at the commencement date (including options). Payments are recognised on a straight-line basis as an expense.
2. Low-Value Asset Exemption
A lessee may elect not to apply the recognition requirements to leases where the underlying asset has a low value when new (the IASB used approximately US$5,000 as a reference). This applies on a lease-by-lease basis, regardless of materiality at an aggregate level. Common examples: personal computers, tablets, small office furniture, printers.
§ 10 — Transition
Transition from IAS 17 to IFRS 16
On first-time adoption of IFRS 16, entities had a choice of two transition approaches:
Approach 1
Full Retrospective
- Comparative periods restated as if IFRS 16 had always applied
- Consistent and comparable year-on-year data
- More complex and costly to implement
- Requires restatement of prior period balance sheets
Approach 2 (Most Common)
Modified Retrospective
- Cumulative effect recognised in retained earnings on date of initial application
- Comparative periods not restated
- Simpler to apply; most entities chose this method
- Two sub-options for measuring ROU asset on transition
Under the modified retrospective approach, entities could measure the ROU asset either: (a) as if IFRS 16 had applied from lease commencement (using original discount rate), or (b) equal to the lease liability adjusted for prepaid/accrued lease payments (the simpler “equalise” method).
§ 11 — FAQ
Frequently Asked Questions
What is the main difference between IAS 17 and IFRS 16?
The fundamental difference is in how lessees account for leases. IAS 17 used a dual classification model, operating leases were kept off the balance sheet, while finance leases were recognised as assets and liabilities. IFRS 16 abolished this distinction for lessees, requiring virtually all leases to be recognised on the balance sheet as a Right-of-Use (ROU) asset and corresponding lease liability.
When did IFRS 16 replace IAS 17?
IFRS 16 was issued in January 2016 by the IASB and became mandatory for annual reporting periods beginning on or after 1 January 2019. Early adoption was permitted provided IFRS 15 (Revenue from Contracts with Customers) had also been applied.
Did IFRS 16 change lessor accounting?
No; lessor accounting under IFRS 16 is substantially similar to IAS 17. Lessors continue to classify leases as either finance leases or operating leases, and the accounting for each classification remains broadly the same. The most notable additions for lessors relate to subleases and sale-and-leaseback transactions.
How does IFRS 16 affect EBITDA?
IFRS 16 increases reported EBITDA for companies with material operating leases. Under IAS 17, the full operating lease payment reduced EBITDA. Under IFRS 16, that payment is replaced by depreciation of the ROU asset (which is below EBITDA) and interest on the lease liability (which is also below EBITDA). This makes EBITDA comparisons between pre- and post-IFRS 16 periods unreliable without adjustment.
What are the practical exemptions under IFRS 16?
Lessees may elect to apply simplified accounting (expense rather than recognise) for: (1) short-term leases those with a term of 12 months or less and (2) low-value asset leases where the underlying asset has a low value when new (approximately US$5,000 per the IASB’s guidance).
Is IFRS 16 the same as ASC 842 (US GAAP)?
IFRS 16 and ASC 842 are similar in spirit, both require operating leases to come onto the lessee’s balance sheet. However, they differ in that ASC 842 retains a dual classification for lessees (finance vs operating) for P&L purposes, while IFRS 16 applies a single model. The income statement presentation therefore differs between IFRS and US GAAP.
Can a company still have off-balance-sheet leases under IFRS 16?
Yes, but only through the two practical exemptions: short-term leases (≤12 months) and low-value asset leases. All other leases must be recognised on-balance-sheet. Some variable lease payment structures may also result in portions remaining off-balance-sheet if they do not depend on an index or rate.
(Qualified) Chartered Accountant – ICAP
Master of Commerce – HEC, Pakistan
Bachelor of Accounting (Honours) – AeU, Malaysia