Lease Contracts Standard IFRS 16 and the Impact of Its Application

Lease Contracts Standard is one of the most prominent international financial reporting standards, addressing the relationship between a company and its lease agreements.

Today, we will discuss this international standard, examine the impact of its implementation, and explore further details related to it.

Lease Contracts Standard – IFRS 16

Some companies may need to lease offices, vehicles, or other facilities to support their operations and business activities.

The Lease Contracts Standard is one of the key international standards that addresses the requirements for recognition, presentation, measurement, and disclosure related to lease agreements.

This standard emerged as a result of joint efforts between the U.S. Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB).

The main purpose of implementing the Lease Contracts Standard is to provide information about leasing transactions to the contracting parties, whether lessors or lessees.

Previously, lease contracts were categorized into finance and operating leases. Operating lease obligations did not appear on financial statements, which compromised transparency and disclosure principles in financial reporting.

As a result, the concept of Lease Contracts Standard (IFRS 16) was introduced.

IFRS 16 applies to various types of lease agreements, although some leases and leasing activities are excluded from the scope of this standard, such as:

Leases of biological assets held by the lessee
Leases related to non-renewable resource extraction
Intellectual property licenses granted by the lessor
Franchise service arrangements
Lessee rights under licensing agreements

Impact of Applying IFRS 16

As for the impact of applying the Lease Contracts Standard, there are several effects on different aspects of company financial statements:

1. Financial Position
Lease assets are included under assets, while lease obligations are recorded under liabilities.

2. Income Statement
Rental expenses are broken down into depreciation and financing costs.

3. Cash Flow Statement
Leases are included in financing activities instead of operating activities.

Difference Between IAS 17 and IFRS 16

IAS 17 refers to the previous accounting standard for leases, whereas IFRS 16 is the current international financial reporting standard governing leases.

There are significant differences between the two:

IAS 17
Under this standard, leases were classified as either operating or finance leases. Finance leases appeared on the balance sheet, while operating leases were disclosed in the notes, making cross-company comparisons difficult.

IFRS 16
This new Lease Contracts Standard addresses that issue by requiring all leases to be recorded in the lessee’s books as finance leases.

This enhances financial transparency and comparability between companies that lease assets and those that borrow to purchase them.

Hence, IFRS 16 introduces a set of changes regarding the accounting treatment of lease contracts based on sound accounting principles for lessees.

Professional Support for Implementation

Rakaez for Business, a licensed professional firm in Saudi Arabia, offers a variety of accounting and financial services for Saudi companies. Their team consists of certified and qualified accountants and auditors.

Among their services is the conversion to International Financial Reporting Standards (IFRS), handled by experienced professionals.

To conclude, we’ve covered the Lease Contracts Standard – IFRS 16, its implications on financial statements, and the key differences between IAS 17 and IFRS 16.

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