What is the Difference Between IAS 17 and IFRS 16?

The main differences between IAS 17 and IFRS 16 are related to the accounting treatment of leases. IFRS 16, which was issued in January 2016, replaced IAS 17 and has a significant impact on the balance sheets of lessees with large operating leases. The key differences between the two standards are:

1. Lease Classification: Under IAS 17, there were two types of leases: Finance and Operating. Finance leases transfer substantially all the risks and rewards of ownership to the lessee, while operating leases only provide the lessee with the right to use the asset without substantial risks and rewards. In contrast, IFRS 16 eliminates the distinction between finance and operating leases for lessees and requires them to recognize nearly all leases on the balance sheet as assets and liabilities, except for short-term leases (less than 12 months) and leases of low-value assets.
2. Balance Sheet Recognition: Under IFRS 16, lessees are required to recognize all leases on the balance sheet, whereas under IAS 17, only finance leases were recognized on the balance sheet, and operating leases were not.
3. Right of Use Asset: With the introduction of IFRS 16, lessees recognize a right of use asset and a lease liability for most leases, while under IAS 17, a straight-lining asset or liability was recognized only for finance leases.
4. Lessor Accounting: Lessor accounting remains largely unchanged under IFRS 16 compared to IAS 17.
5. Separation of Contractual Relationships: Under IFRS 16, leasing and non-leasing components must be separated in leasing agreements, and other contractual services or materials purchased in addition to the lease must be accounted for separately by the lessees.

The introduction of IFRS 16 aimed to increase transparency and accuracy in financial reporting, promote international consistency in lease accounting standards, and eliminate the use of operating leases to manipulate financial statements.

Comparative Table: IAS 17 vs IFRS 16

The main differences between IAS 17 and IFRS 16 are related to the accounting treatment of leases for lessees. Here is a summary of the key differences:

Under IAS 17, leases were classified into two types: Finance and Operating. Finance leases transfer substantially all of the risks and rewards associated with the asset, while operating leases do not. Lessees were required to classify their leases based on the substance of the agreement, regardless of its legal form. This classification system led to some operating leases not being recognized on the balance sheet.

In contrast, IFRS 16 eliminates the distinction between finance and operating leases for lessees. All leases are now treated as finance leases and recognized on the balance sheet, regardless of their form. This change in accounting treatment is intended to enhance comparability and transparency on balance sheets. The accounting for lessors remains largely unchanged under IFRS 16.