What is IFRS 16 and How Does it Apply to Real Estate?

What is IFRS 16 and How Does it Apply to Real Estate?

IFRS 16 is an international financial reporting standard issued by the International Accounting Standards Board (IASB) that changes how companies account for leases on their financial statements. It was implemented starting January 1, 2019, replacing the previous standard, IAS 17.

Under IFRS 16, companies are required to recognize nearly all leases on their balance sheet, which marks a significant shift from the previous standards where only capital leases were capitalized. This standard requires that lessees record a right-of-use asset and a corresponding lease liability for the duration of the lease, unless the lease term is 12 months or less or the underlying asset has a low value.

In terms of real estate, this standard affects how companies report their real estate leases. Real estate used to be leased under operating lease arrangements that were not recorded on the balance sheet. With IFRS 16, these leases now result in a recorded asset and liability, reflecting the company's right to use the property and the obligation to make lease payments. This change impacts not only the balance sheet but also financial ratios and metrics derived from it, which can influence decisions made by investors, lenders, and other stakeholders.