IAS 17 vs. IFRS 16

Attribute	IAS 17	IFRS 16
Scope	Leases are classified as either finance leases or operating leases.	Leases are classified as either finance leases or operating leases.
Recognition	Finance leases are recognized as assets and liabilities on the balance sheet.	All leases, including operating leases, are recognized as assets and liabilities on the balance sheet.
Measurement	Finance leases are initially measured at the lower of fair value or present value of minimum lease payments.	Lease liabilities are initially measured at the present value of lease payments, while right-of-use assets are measured at cost.
Lease Term	Lease term is determined based on the non-cancellable period of the lease.	Lease term includes both the non-cancellable period and any extension options that are reasonably certain to be exercised.
Lease Payments	Lease payments are classified as either finance costs or reduction of the lease liability.	Lease payments are allocated between the reduction of the lease liability and interest expense.
Subsequent Measurement	Finance leases are measured using the effective interest method.	Lease liabilities are measured using the effective interest method, while right-of-use assets are depreciated over the lease term.
Disclosure	Specific disclosure requirements for finance leases and operating leases.	Enhanced disclosure requirements, including quantitative and qualitative information about leases.

Introduction

IAS 17, also known as the International Accounting Standard 17, and IFRS 16, the International Financial Reporting Standard 16, are two significant accounting standards that deal with lease accounting. While IAS 17 was the previous standard, IFRS 16 replaced it in January 2019. This article aims to compare the attributes of IAS 17 and IFRS 16, highlighting the key differences and implications for businesses.

Scope and Definition

Under IAS 17, leases were classified as either finance leases or operating leases. Finance leases were recognized on the balance sheet, while operating leases were not. On the other hand, IFRS 16 eliminates the distinction between finance and operating leases for lessees. Instead, it introduces a single model where all leases are recognized on the balance sheet as right-of-use assets and lease liabilities.

Furthermore, IFRS 16 provides a more detailed definition of a lease, emphasizing that a lease exists when a customer has the right to control the use of an identified asset for a period of time in exchange for consideration.

Recognition and Measurement

IAS 17 required lessees to classify leases as either finance or operating leases based on specific criteria. Finance leases were recognized as assets and liabilities at the lower of the fair value of the leased asset or the present value of the minimum lease payments. Operating leases, on the other hand, were not recognized on the balance sheet.

Under IFRS 16, lessees are required to recognize a right-of-use asset and a lease liability for all leases, except for short-term leases (leases with a term of 12 months or less) and leases of low-value assets. The right-of-use asset is initially measured at the present value of the lease payments, while the lease liability is measured at the same amount, adjusted for lease incentives, initial direct costs, and any prepaid or accrued lease payments.

Lease Term and Discount Rate

IAS 17 defined the lease term as the non-cancellable period for which the lessee has the right to use the leased asset, including any periods covered by an option to extend the lease if the lessee is reasonably certain to exercise that option. The discount rate used to calculate the present value of minimum lease payments was typically the lessee's incremental borrowing rate.

IFRS 16 defines the lease term as the non-cancellable period, including periods covered by options to extend or terminate the lease if the lessee is reasonably certain to exercise those options. The discount rate used to calculate the present value of lease payments is the lessee's incremental borrowing rate, unless the rate implicit in the lease is readily determinable, in which case that rate should be used.

Lease Modifications and Remeasurements

IAS 17 did not provide specific guidance on lease modifications. Instead, it required lessees to reassess the classification of a lease when there was a change in the terms and conditions of the lease agreement.

IFRS 16, on the other hand, provides detailed guidance on lease modifications. It requires lessees to account for lease modifications as separate leases if the modification increases the scope of the lease. If the modification decreases the scope of the lease, the lessee is required to remeasure the lease liability based on the revised lease payments and adjust the right-of-use asset accordingly.

Disclosure Requirements

IAS 17 had specific disclosure requirements for finance leases and operating leases. For finance leases, lessees were required to disclose the minimum lease payments, the present value of the minimum lease payments, and the assets obtained. For operating leases, lessees were required to disclose the total future minimum lease payments under non-cancellable leases.

IFRS 16 introduces more extensive disclosure requirements. Lessees are now required to provide information about the nature of their leases, the significant judgments and assumptions made in applying the standard, and the amounts recognized in the financial statements. Additionally, they must disclose the maturity analysis of lease liabilities, the weighted average remaining lease term, and the weighted average discount rate used.

Conclusion

IAS 17 and IFRS 16 represent two distinct accounting standards for lease accounting. While IAS 17 focused on the classification of leases as finance or operating leases, IFRS 16 requires lessees to recognize all leases on the balance sheet. The introduction of right-of-use assets and lease liabilities under IFRS 16 provides a more transparent and comprehensive view of a company's lease obligations. The new standard also brings about significant changes in recognition, measurement, lease term, lease modifications, and disclosure requirements. Businesses must ensure they understand and comply with the requirements of IFRS 16 to accurately reflect their lease arrangements in their financial statements.