An equipment leasing company (the lessor) leases identical forklifts to two different customers (the lessees) under separate lease contracts. Under IFRS 16, how do the accounting models applied by the lessor and by each lessee to these leases compare?
- The lessor and each lessee apply the identical single on-balance-sheet model, because IFRS 16 eliminated the finance-versus-operating lease distinction for every party to a lease
- Each lessee classifies its lease as finance or operating based on the transfer of risks and rewards, while the lessor recognizes a single right-of-use asset and lease liability for every contract it enters into
- Each lessee applies a single lessee accounting model, recognizing a right-of-use asset and a lease liability for substantially all of its leases (subject to limited exemptions), while the lessor still classifies each lease as either a finance lease or an operating lease based on the transfer of risks and rewards of ownership
- Neither party recognizes anything on its balance sheet at lease commencement; both simply expense the lease payments as incurred throughout the lease term
Why C? And why not the others?
Correct answer: C. Each lessee applies a single lessee accounting model, recognizing a right-of-use asset and a lease liability for substantially all of its leases (subject to limited exemptions), while the lessor still classifies each lease as either a finance lease or an operating lease based on the transfer of risks and rewards of ownership
IFRS 16 paragraph 22 requires a lessee to apply a single accounting model, recognizing a right-of-use asset and a lease liability for substantially all of its leases, subject only to the short-term and low-value recognition exemptions; the old finance-versus-operating distinction was removed for lessees. IFRS 16 paragraphs 61-66, however, retain the previous dual classification approach for lessors, who must still classify each lease as a finance lease or an operating lease based on the extent to which the lease transfers the risks and rewards incidental to ownership of the underlying asset. So the lessor's model was left substantively unchanged even though the lessee's model changed fundamentally. The option claiming both parties now apply the identical single model is wrong because only lessees were moved to the single on-balance-sheet model; lessors kept the dual classification test. The option that swaps the two roles is wrong because it describes lessees as still using risk-and-reward classification and lessors as using the single right-of-use model, the reverse of what IFRS 16 actually requires. The option claiming neither party recognizes anything at commencement is wrong because lessees recognize a right-of-use asset and lease liability up front, and lessors recognize either a net investment in the lease (finance lease) or continue reporting the underlying asset (operating lease).
Source: IFRS 16 Leases, paragraph 22 (single lessee model) and paragraphs 61-66 (lessor classification)