Accounting for leased assets- drawbacks of IAS 17 and new accounting model under IFRS 16

Abstract

This paper reviews prior researches to point out drawback of lease accounting model used in IAS 17 which requires lessee to classify leases into operating leases and finance leases and only recognize assets as well as liabilities arising from finance lease contracts. Companies have altered contract terms to avoid recognizing liabilities arising from lease. Empirical researches find that lease capitalization affects significantly to numbers reported on financial statements and financial ratios. To overcome the loopholes in IAS 17, IASB has, in June 2016, issued a new standard on lease accounting- IFRS 16. The new standard requires the lessee to recognize assets and related liabilities arising from all lease contracts unless the lease term is 12 months or less or underlying assets has low value. This paper also discusses on new concept of lease contract under IFRS 16, guidance for lessee in how to measure and recognize “right of use assets” and liabilities.