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IFRS 16 changes the accounting substantially for lessees. The new Standard eliminates a lessee’s classification of leases as either operating leases or finance leases. Instead, almost all leases are ‘capitalised’ by recognising a lease liability and right-of-use asset on the balance sheet. There is little change for lessors.
Leasing is a common form of finance. The Effects Analysis, published alongside the Standard in 2016, described the likely costs and benefits of IFRS 16. This analysis estimated that listed companies around the world have around $3 trillion worth of future payments for leases, which were not recognised on the balance sheet applying the previous accounting requirements.
IFRS 16 will increase visibility of companies’ lease commitments and better reflect economic reality. The Standard will also make it easier for users of financial statements to compare companies that lease their assets with companies that borrow money to buy their assets, creating a more level playing field.