IFRS 16 introduces several practical expedients for its initial application, easing the transition from IAS 17 as outlined below.
Definition of a lease
Entities are not required to reassess their existing contracts at the initial application date of IFRS 16 to determine if they are leases (or contain leases). Instead, contracts previously identified as leases under IAS 17 and IFRIC 4 can continue to be treated as such under IFRS 16 (IFRS 16.C3-C4).
Modified retrospective application
Lessees are exempt from the full retrospective application as mandated by IAS 8. They may instead opt for a ‘modified retrospective’ approach. This method does not require restating comparative data. Instead, the cumulative effects of adopting IFRS 16 are recognised as an adjustment to the opening equity balance on the initial application date of IFRS 16 (IFRS 16.C5-C7).
Leases previously classified as operating leases
Leases that were earlier classified as operating leases under IAS 17 should now be accounted for using the modified retrospective approach, as detailed in IFRS 16.C8-C9. IFRS 16.C10 outlines additional practical expedients for these leases.
Disclosure on initial application
When applying IFRS 16 using the modified retrospective approach, entities must reconcile the operating lease commitments reported under IAS 17 with the lease liabilities recognised at the initial application of IFRS 16 (IFRS 16.C12).
Sale and leaseback transactions
IFRS 16 includes specific guidelines for sale and leaseback transactions. The transition requirements for these transactions are specified in IFRS 16.C16-C18.
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Adjustments for business combinations
Prior to IFRS 16, IFRS 3 mandated the recognition of favourable or unfavourable terms of operating leases acquired in a business combination as distinct assets or liabilities. With the transition to IFRS 16, these assets or liabilities should be derecognised, adjusting the carrying amount of the right-of-use asset accordingly (IFRS 16.C19).
More about IFRS 16
See other pages relating to IFRS 16: