IFRS 16 Leases

General Impact

Impact on accounting treatments:

IFRS 16 Leases make a significant change in the accounting treatments for operating lease, finance lease, and other complex transaction such as sales and leaseback accounting, etc.

+ For the Lessee: The new standard eliminates a lessee’s classification of leases as either operating lease or finance lease. Instead, almost all leases are ‘capitalized’ by recognizing a lease liability and Right-Of-Use asset on the balance sheet – accompanied by a depreciation of the asset and financial interest to the lease liabilities.

+ For the Lessors: the standard requires lessors to classify each lease as an operating lease or a finance lease. For finance leases: at the commencement of the lease, the lessor will recognize the asset held under the finance lease as a receivable for an amount equal to the net investment in the lease, and recognize financial income over the lease term, based on a model that reflects a fixed periodic rate of return on that net investment. For operating leases: the lessor records lease payments as income on a straight-line basis.

Impact on Financial Ratios:

With the recognition of lease liabilities (including long-term and short-term liabilities) and the Right-Of-Use asset, the current financial ratio of the entity may vary when the application of the new standard takes place. These changes may affect the financial measurement result of the entity, also with the current loan covenants condition.

The objective of IFRS 16 is to report information that faithfully presents lease transactions and to provide a basis for users of financial statements to assess the amount, timing, and uncertainty of cash flows incurred. from the lease. To meet that objective, the lessee must recognize the assets and liabilities arising from the lease.

Conversion issues




IFRS 16 – Leases (effective January 1, 2019) and VAS 6 – Leases

Lessee accounting - initial recognition

On the date the leased asset becomes ready for use, the lessee should recognize the right-of-use asset and the lease liability:

- The value of the right - to - use asset is determined at cost.

- The amount of the lease liability is measured at the present value of the unpaid lease payments on that date. Lease payments should be discounted using the interest rate implicit in the lease, if such an interest rate can be readily determined. If such interest rate cannot be readily determined, the lessee should use the lessee's incremental borrowing rate.

The operating lessee only accounts for periodical rental as an expense.

The financial lessee should recognize finance lease assets and finance lease liabilities

Lessee accounting - subsequent measurement

The value of the use right asset is determined according to the cost model.

Lease liabilities are determined by increasing the carrying amount to reflect the interest charged on the lease liabilities, decreasing the carrying amount to reflect the lease payments paid.

Not available for operating lessee;


For finance lessees: amortize finance lease assets and account for finance lease payment obligations using the amortized cost method.


New definition and requirement under IFRS 16


IFRS 16 applies to all leases, including subleases, except for:

(a) Leases to explore for or use minerals, oil, natural gas, and similar non-regenerative resources;

(b) Leases of biological assets held by a lessee (see IAS 41 agriculture);

(c) Service concession arrangements (see IFRIC 12 service concession arrangement);

(d) Licenses of intellectual property granted by a lessor (see IFRS 15 revenue from contracts with customers); and

(e) Rights held by a lessee under licensing agreements for items such as films, videos, play manuscripts, patents, and copyrights within the scope of IAS 38 intangible assets.


The following instances are eligible for exemption of IFRS 16:

(a) Leases with a lease term of 12 months or under and containing no purchase options; and

(b) leases when the underlying asset has a low value when new (according to management judgment).

First adoption

The two retroactive methods of initial application permitted by IFRS 16 include:

• retrospectively to each prior reporting period presented applying IAS 8

Accounting Policies, Changes in Accounting Estimates and Errors.

• retrospectively with the cumulative effect of initially applying the

Standard recognised at the date of initial application.

Discounting factor determination

The implicit interest rate in a lease is the discount rate used to calculate the present value of (a) the lease payments and (b) the unguaranteed residual value to equal the sum of (i) the fair value of the underlying asset and (ii) the initial direct costs of the lessor.

In cases where the implicit interest rate on a lease cannot be determined easily, the discount rate is the lessee's incremental borrowing rate at the effective date.


If there are indicators of impairment of leased assets, IAS 36 shall be applied for the impairment test of the Right-Of-Use asset.

Sale and leaseback transaction

IFRS 16 requires the assessment of the nature of transactions, whether the "sale" is qualified for IFRS 15, before determining appropriate accounting treatments.

Change/modification of the lease contract

IFRS 16 requires the assessment of whether the changes/modifications might cause the lessee to independently account for this change/modification as a separate lease contract.

What work needs to be done?

• An enterprise needs to estimate the impact of the changes in applying IFRS 16 to the financial ratios it currently uses, including the conditions under the Debt covenant.

• Renegotiate the lease agreement and identify key terms of the lease that affect financial ratios if necessary.

At Crowe Vietnam, we offer a full range of IFRS services that meet the exact requirements of each individual client.