IFRS 16 vs IAS 17

This article elucidates the IFRS 16 vs IAS 17 comparison of accounting standards for leases and why IFRS 16 is an improvement. The scope covers consideration of how it impacts decision-making and reporting along with financial reporting.

What are lease accounting standards, and why are they important?

Lease accounting standards dictate how companies account for lease agreements. The IFRS 16 vs IAS 17 debate touches upon whether and to what extent leases are capitalised to keep practices uniform and transparent.

• Lease accounting requirements see that there is uniform reporting of lease transactions by organisations.
• They enable users of financial statements to understand firms’ lease obligations clearly.
• IAS 17 vs IFRS 16 are at the core of international guidelines for accounting for leases.

Clear accounting for leases enhances investor confidence and comparability between firms that have leasing operations.

Why were changes introduced in lease accounting?

Changes to lease accounting were a necessity, as IAS 17 allowed for a significant number of leases to go off-balance-sheet, thereby becoming less transparent. IFRS 16 was introduced to correct this and to provide a realistic picture of lease obligations.

• IAS 17 classified leases as finance or operating, and operating leases were usually hidden off balance sheet.
• Such off-balance-sheet treatment led to significant liabilities being non-transparent to investors and creditors.
• IFRS 16 requires almost all leases to be presented on the balance sheet, thereby increasing transparency.

Such a difference between IAS 17 and IFRS 16 represents progress to enhance financial disclosure along with reporting equity.

What is the main difference between IFRS 16 and IAS 17?

The main IFRS 16 vs IAS 17 difference is that IFRS 16 requires lessees to report almost all leases on the balance sheet, but IAS 17 allows operating leases to remain off balance sheet.

• IAS 17 used a dual approach: finance leases on the balance sheet and operating leases off the balance sheet.
• IFRS 16 uses a single model that requires lessees to account for right-of-use assets and lease liabilities for essentially all leases.
• This change removes operating lease classification for lessees.

Consequently, company financial statements are now more indicative of firms’ real financial liabilities under leases.

What does IFRS 16 cover, and who does it apply to?

IFRS 16 covers lease recognition, measurement, and disclosure and impacts almost all companies with leases internationally. The exceptions are those with short-term and low-value leases.

• Applicable to all leases other than those less than 12 months in duration or assets of limited value.
• Effective from January 1, 2019, replacing IAS 17.
• Mandates that companies calculate lease obligations using the present value of future payments under leases.
• Lessees must recognise a right-of-use asset along with a lease liability.

IFRS 16 aims to unify worldwide lease accounting, achieving higher consistency within sectors.

What are the key differences between IFRS 16 and IAS 17?

Recognition on Balance Sheet

The significant difference between IAS 17 and IFRS 16 is that IFRS 16 typically classifies most leases on the balance sheet, leading to higher reported assets and liabilities.

• IAS 17 demanded finance leases to appear only on the balance sheet, while operating leases were expensed off balance sheet.
• IFRS 16 requires lessees to recognise a right-of-use asset and a lease liability for most leases.
• This change requires investors and creditors to be more knowledgeable about lease obligations.

Source: IFRS 16 ANALYSIS

Impact on Lessees vs Lessors

While IFRS 16 makes substantive changes to lessee accounting, lessor accounting remains essentially unchanged from IAS 17.

• Lessees are required to classify lease assets and liabilities on the balance sheet.
• Lessors still fall under operating or finance leases but with little change to their accounting.
• This means that lessee financial reporting is heavily influenced by IFRS IAS 17 leases.

Expense Recognition and Measurement

Expensing under IFRS 16 contrasts with IAS 17, which changes profit and loss statement trends.

• IAS 17 treated payment for operating leases as rent expense to be accounted for on a straight-line basis.
• IFRS 16 splits costs between depreciation (right-of-use asset) and interest expense (lease liability).
• This means higher costs at the beginning of the lease period and lower costs at later times.

Disclosure Requirements

IFRS 16 requires enhanced detailed disclosures to encourage transparency around lease terms and risks.

• Entities must present qualitative and quantitative disclosures for leases.
• Disclosures consist of maturity analysis of lease liability and of variable lease payments.
• Extended disclosure requirements allow investors to better understand lease obligations.

Curious About IFRS 16 vs IAS 17?

Inquire More!

How does the transition from IAS 17 to IFRS 16 affect financial reporting?

Financial Statements and Ratios

Converting to IFRS 16 will affect important financial metrics by increasing assets and liabilities within the balance sheet.

• More right-of-use assets and lease liabilities impact debt-to-equity and return-on-assets measures.
• EBITDA generally rises as lease expense is replaced with depreciation and interest.
• It has differing implications by sector, depending upon how leased a company is.

Effect on Stakeholders and Reporting

Improved lease transparency leads to improved decision-making by stakeholders.

• Investors are presented with a comprehensive view of a company’s debt requirements.
• It will be less complicated for lenders to consider creditworthiness.
• Regulators benefit from increased reporting consistency and comparability.

Practical Challenges During Implementation

Adoption of IFRS 16 poses practical difficulties for companies.

• It is time-consuming and complicated to collect lease data from numerous agreements.
• Systems and procedures will have to be updated to account for new requirements for measurement and disclosure.
• Staff training is necessary to appropriately implement the standard.

What are the advantages of IFRS 16 compared to IAS 17?

Greater Transparency and Comparability

IFRS 16 enhances transparency of financial statements by disclosing virtually all leases on the balance sheet.

• This transparency makes comparison of firms that have different portfolios of leases easier.
• Financial health will be easier to estimate by investors and analysts.

Improved Investor Confidence

Improvements to financial reporting strengthen investor confidence in company disclosures.

• Proper reporting of leases minimises ambiguity regarding latent liabilities.
• This can lead to enhanced valuation as well as lower capital costs.

Better Decision-Making

Better management decisions are supported by improved lease data.

• Helps management to know the economic impact of obligations under lease.
• Supports budgeting, investment, and funding methods

Why is IFRS 16 considered a game-changer in lease accounting?

IFRS 16 fundamentally changes accounting for leases by eliminating off-balance-sheet leases, thereby increasing the accuracy and comparability of financial statements. 

• Firms are now required to identify lease assets and liabilities, capturing the economic substance of leases. 
• This amendment fills holes under IAS 17 that allowed lease obligations to be concealed. 
• Stakeholders will be able to trust financial statements that include lease obligations completely. 

The IFRS 16 course is therefore a landmark development for global accounting standards and a valuable step towards earning an IFRS certification.

Source: IFRS 16 LEASES

Planning to IFRS Accounting Career?

Click Here

To Book Your Free Counselling Session

FAQs on IFRS 16 vs IAS 17

Why was IFRS 16 introduced to replace IAS 17?

IFRS 16 replaced IAS 17 to make reporting more transparent by putting all leases on the balance sheet, thus making financial reports more comparable and trustworthy.

What is the main difference between IFRS 16 and IAS 17?

The main difference between IAS 17 and IFRS 16 is that IFRS 16 requires lessees to account for nearly all leases on the balance sheet, while IAS 17 allows most leases to stay off-balance sheet.

Does IFRS 16 apply to all types of leases?

IFRS 16 applies to all leases that are not short-term or leases of low-value assets with optional simplified accounting treatments.

How does IFRS 16 affect financial statements compared to IAS 17?

IFRS 16 introduces assets and liabilities to the balance sheet and changes rent expense recognition to depreciation and interest expense, with implications for important financial ratios.

Partham Barot is an ACCA-certified professional. showcasing his expertise in finance and accountancy. he’s revolutionising education by focusing on practical, real-world skills. Partham’s achievements underscore his commitment to elevating educational standards and empowering the next generation of professionals.