IFRS leases – A lessee can choose to apply IFRS 16 through either a full retrospective approach or using a simplified approach. The simplified approach seems to provide some benefits to the preparers of financial statements when applying module 2.
Under the retrospective approach, a company applies the new standard retrospectively in accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors. Comparatives also need to be restated.
Changes in accounting policies
An entity is permitted to change an accounting policy only if the change: is required by a standard or interpretation. [IAS 8.14]
Retrospective application means adjusting the opening balance of each affected component of equity for the earliest prior period presented and the other comparative amounts disclosed for each prior period presented as if the new accounting policy had always been applied. (In other words: restate prior financial information) [IAS 8.22]
Modified (Simplified) Approach
Under the simplified approach, a company applies IFRS 16 from the beginning of the current period. This requires the following:
- Calculating lease assets and lease liabilities as at the beginning of the current period using the unique rules included in IFRS 16.
- Do not restate prior-period financial information.
- Recognising an adjustment in equity at the beginning of the current period – depending on the unique rules included in IFRS 16.
Adjustment to equity at beginning of current period (See Module 1)
This applies when:
- The lease was previously classified as operating lease and continues under IFRS 16.
- Management wants to reflect that IFRS 16 had always been applied.
No adjustment to equity at beginning of current period (See Module 2)
This applies when:
- Right-of-use (ROU) asset is based on the present value of remaining lease payments.
The Retrospective and Simplified approaches are best illustrated by way of example: