This blog is written by Mr. Omar Rafeh Chughtai, Associate Taxation and Corporate Services. Pleas read this blog and provide your valued comments.
IFRS 16 succeeds IAS 17. IFRS 16 specifies how a lease will be recognized, measured, presented and most importantly disclosed. This standard requires lessees to recognize assets and liabilities for all leases unless lease term is 12 months or less or the asset has a low value. Leases are classified as either operating or finance.
Difference between IFRS 16 and IAS 17:
The basic difference between the two is how an operating lease will be brought to the balance sheet. Under IAS 17, there was no obligation to report assets and liabilities from operating lease to the balance sheet and were instead referred to in the footnotes. IFRS 16 changes this and requires assets and lease liabilities to be recognized on the balance sheet. IFRS 16 contains a new lease definition. The actual wording of the definition does not change too much from the IAS 17 but there is a greater emphasis and weight surrounding how a lease differs from a service.
As a result of the change the comparability and transparency of the balance sheet will be improved. The users of the financial statement will now able to clearly see the effect of operating lease and have a basis to compare with other companies. Under IAS 17, it was difficult to compare companies who lease and who buy. Accounting departments will be impacted by the new standard in the first year of financial reporting due to the changes. Accounts of many companies will change dramatically and there will be a big increase in assets as well as increase in liabilities. This will mean that standard capital and debt ratios will change. Adoption of the new standard will also result in additional tax related considerations depending on the jurisdiction.
Omar Rafeh Chughtai