What impact does lease accounting under IFRS 16 have on lessees?

Under IFRS 16, lessees are required to recognize a right-of-use asset and a lease liability on their balance sheet for most leases. This accounting treatment reflects the economic reality of leasing arrangements by recognizing that the lessee has control over an asset and an obligation to make lease payments over the term of the lease.

The right-of-use asset represents the lessee's right to use the leased asset for the duration of the lease, while the lease liability represents the present value of future lease payments that the lessee is obligated to pay. This dual recognition enhances transparency in financial reporting, as it provides a clearer picture of a company's liabilities and assets.

By recognizing both the asset and the liability, the financial statements better reflect the operational and financial commitments arising from lease contracts. This is a significant change from previous standards, where operating leases were often not included on the balance sheet, resulting in a less comprehensive view of a company's financial position.

This treatment helps investors and stakeholders understand the true extent of a company's leasing obligations and the resources available to manage those obligations. Overall, IFRS 16 aims to improve comparability among lessees and provide a more faithful representation of lease transactions in the financial statements.