What is Lease Accounting (IFRS 16)?
IFRS 16 is the lease accounting standard that replaced IAS 17 in 2019. It requires lessees to recognise nearly all leases on the balance sheet as a right-of-use asset and a corresponding lease liability, eliminating the old operating lease classification. Lessor accounting is broadly unchanged, retaining the operating versus finance lease split.
How It Works
- Identify contracts that contain a lease (right to control an identified asset for a period in exchange for consideration).
- Calculate the lease liability as the present value of the lease payments over the lease term.
- Recognise the right-of-use asset equal to the liability plus initial direct costs and prepayments, less any lease incentives received.
- Charge depreciation on the asset and interest on the liability to profit or loss over the lease term.
Saudi Context
Saudi entities reporting under IFRS as adopted by SOCPA apply IFRS 16 from 2019. The standard significantly grosses up the balance sheets of retailers, airlines, and any business with multi-year property leases. ZATCA permits IFRS 16 treatment for income tax base purposes, with specific zakat base adjustments under updated guidance.
Example
A Riyadh retailer signs a 5-year shop lease at SAR 300,000 per year. At 6% discount rate, the lease liability is about SAR 1.26 million; the right-of-use asset matches. Depreciation and interest replace the previous SAR 300,000 rent expense.