International Accounting Standards Committee (IASC) founded in 1973 introduced a series of accounting standards named International Accounting Standards (IAS) which were in practice until the incorporation of the International Accounting Standards Board (IASB) in 2001. When the IASB was established in 2001, it agreed to adopt all IAS standards, and name future standards as IFRS (International Financial Reporting Standards). In the event of any contradictions, IAS standards are superseded by IFRS standards. Both IAS 17 and IFRS 16 are regarding Leases; where IAS 17 is the old standard which was replaced by IFRS 16. The key difference between IAS 17 and IFRS 16 is that according to the old standard (IAS 17) operating leases are not capitalized whereas they are considered as capitalized assets and recorded in the balance sheet under IFRS 16.
CONTENTS
1. Overview and Key Difference
2. What is IAS 17
3. What is IFRS 16
4. Side by Side Comparison – IAS 17 vs IFRS 16
5. Summary
What is IAS 17?
This standard sets out the guidelines for recognizing and subsequent disclosure requirements for leases (agreement where one party rents out land, building etc. to another party). ‘Lessee’ in a lease is the party who rents the asset whereas ‘lessor’ is the party who grants the lease.
Classification of leases is dependent on whether it is a finance lease or an operating lease.
Figure_1: Finance Lease vs. Operating Lease
Accounting treatment for a finance lease
- At the beginning, the leased asset should be recognized as an asset by the lessee. A finance charge is payable by the lessee to the lessor at a constant rate of interest on the lease for the outstanding liability. Depreciation is charged based on the company policy, and the asset should be depreciated over the shorter of the lease term or the estimated life of the asset.
- At the beginning of the lease term, the lessor should recognize the finance lease as a receivable in the balance sheet, and the subsequent interest received as finance income.
Accounting treatment for an operating lease
- Here, the lease payments are recognized as an expense and recorded in the income statement generally on a straight-line basis (equal installments paid every year). There will not be any corresponding entries in the balance sheet regarding the lease. Thus, an operating lease is also referred to as an ‘off balance sheet’ element
- The lessor should recognize the payment received as lease income.
The drawback of not recognizing the lease in the balance sheet is that this provides the users of financial statement an inaccurate account of a company’s outstanding expenses. Further, it does not allow comparisons between companies that buy assets and ones that lease assets. This limitation is been addressed under IFRS 16.
What is IFRS 16?
Under IFRS 16 all leases, the operating leases are also capitalized and recorded in a similar manner to finance leases irrespective of whether finance or operating will be treated similarly. Here, the main argument is based on the ‘Right of Use’ (ROU) where the assets are recognized in the balance sheet if they are being used to generate economic benefit.
What is the difference between IAS 17 and IFRS 16?
IAS 17 vs IFRS 16 |
|
| IAS 17 is developed by International Accounting Standards Committee. | IFRS 16 is developed by International Accounting Standards Board. |
| Recognition of Lease | |
| Finance leases are recognized as assets and operating leases are recognized as expenses. | All leases are recognized as assets. |
| Focus | |
| The focus is on who bears the risks and the rewards of the lease | The focus is on who has the right to use the asset. |
Summary – IAS 17 vs IFRS 16
The difference between IAS 17 and IFRS 16 provides a sound example of how accounting treatment for various inputs and outputs in a business is subjected to change over time when new standards become available making the old ones of limited use. New standards are developed in order to evade drawbacks of old ones. Development of IFRS 16 to allow capitalization is an example for the same where more accurate information can be presented to users of financial statements.
Reference:
1. Gholipanah, Pari. “Difference Between IAS and IFRS.” Web log post. Linkedin. N.p., n.d. Web. 8 Feb. 2017.
2. Hendrie, Ryan. “The difference between IAS 17 and IFRS 16: How lease accounting is changing.” Innervision. N.p., n.d. Web. 08 Feb. 2017.
3.”IAS Plus.” IAS 17 – Leases. N.p., n.d. Web. 08 Feb. 2017.
4.” IFRS 16 Leases: Implementation.” IFRS 16 Leases: Implementation. N.p., n.d. Web. 08 Feb. 2017.