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.
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IAS 17 – Leases
IAS 17 defines a lease as an AGREEMENT whereby the lessor grants the lessee the Right to Use an asset for a specified period in return for a payment or a series of payments. According to IAS 17, leases are classified as EITHER ´Finance Leases´ or ´Operating Leases´.
1. Finance Lease
A Finance Lease is a lease that transfers substantially all the risks and rewards incidental to ownership of an asset to the lessee. Under a Finance Lease, the lessee is required to RECOGNIZE the leased asset as an Asset in its balance sheet and to RECOGNIZE a Liability for the present value of the lease payments.
2. Operating Lease
An Operating Lease, is a lease that does NOT transfer substantially all the risks and rewards incidental to ownership of an asset to the lessee. Under an Operating Lease, the lessee is required to RECOGNIZE the lease payments as an Expense in its income statement.
IFRS 16 – Leases
IFRS 16, defines a lease as a contract, or part of a contract, that conveys the Right of Use (RoU) asset for a period of time in exchange for consideration. Unlike IAS 17, IFRS 16 requires lessees to RECOGNIZE all leases on their balance sheets, including both finance leases and operating leases.
Under IFRS 16, lessees are required to RECOGNIZE a Right of Use (RoU) asset and a lease liability for all leases with a term of more than 12 months, UNLESS the underlying asset has a low value. The lease liability should be MEASURED at the present value of the lease payments, while the Right of Use (RoU) asset should be initially MEASURED at the same amount as the lease liability.
IAS 17 Vs IFRS 16 – Key Differences
The Key Difference between IAS 17 and IFRS 16 is that IFRS 16 requires lessees to RECOGNIZE all leases on their balance sheets, while IAS 17 only requires lessees to RECOGNIZE finance leases on their balance sheets.
Another difference i.e. IAS 17 Vs IFRS 16 is the CLASSIFICATION of leases. Under IAS 17, leases are classified as either Finance Lease or Operating Lease based on the risks and rewards incidental to ownership of the asset. Under IFRS 16, all leases are classified as Finance Leases, and the lessee is required to RECOGNIZE a lease liability and a Right of Use (RoU) asset.
IFRS 16 provides MORE guidance on the accounting treatment of Lease Modifications. Under IAS 17, Lease Modifications are generally treated as ‘New Leases‘.
Under IFRS 16, Lease Modifications are ACCOUNTED for as follows:
- If the Modification INCREASES the scope of the lease, the lessee should recognize a new Right of Use (RoU) asset and lease liability.
- If the Modification DECREASES the scope of the lease, the lessee should re-measure the lease liability using a Revised Discount Rate and recognize a gain or loss in profit or loss.
- If the Modification does NOT change the scope of the lease, the lessee should account for it as a Continuation of the existing lease.
The Bottom Line
The concept IAS 17 Vs IFRS 16 describes that Under IFRS 16, lessees are REQUIRED to present Right of Use (RoU) assets separately from other assets on their balance sheets, and lease liabilities separately from other liabilities, Unlike IAS 17.
Chartered Accountant (Institute of Chartered Accountants of Pakistan)
Bachelor of Accounting Honours (Asia e University, Malaysia)