IFRS 16 vs. IAS 17 – Presentation

Entity C has a 5-year lease for the floor of an office building. It pays $75.000 a year and has an incremental borrowing rate of 5% (the rate implicit in the lease is not readily determinable).

The tables below illustrate the impact on net income and EBITDA depending on whether IAS 17 or IFRS 16 is used to account for the lease.

  • IAS 17 – An operating lease will impact P/L straight line over the 5-year period ($75.000 per year).
  • IFRS 16 – A right-of-use asset and a lease liability will initially be recognized at $324.711.

Assume the entity has no other transactions other than $100,000 of sales in each year.

IAS 17

Amortization Interest Op. Costs Net Income
Year 1 $0 $0 $75.000 $25.000
Year 2 $0 $0 $75.000 $25.000
Year 3 $0 $0 $75.000 $25.000
Year 4 $0 $0 $75.000 $25.000
Year 5 $0 $0 $75.000 $25.000
Total $0 $0 $375.000 $125.000

IFRS 16

Amortization Interest Op. Costs Net Income
Year 1 $64.942 $16.235 $0 $18.823
Year 2 $64.942 $13.297 $0 $21.761
Year 3 $64.942 $10.212 $0 $24.846
Year 4 $64.942 $6.972 $0 $28.086
Year 5 $64.942 $3.571 $0 $31.487
Total $324.711 $50.289 $0 $125.000

As illustrated, the net income for the entire 5 year period does not change, but the timing of expense recognition is faster in IFRS 16 since the financing element (interest) is higher at the beginning of the lease and reduces over time.

The more significant difference is the calculation of EBITDA.

IAS 17 IFRS 16
Year 1 $25.000 $100.000
Year 2 $25.000 $100.000
Year 3 $25.000 $100.000
Year 4 $25.000 $100.000
Year 5 $25.000 $100.000
Total $125.000 $500.000

IFRS 16 results in significantly higher EBITDA than under IAS 17, as all components of the expenses relating to the leases (amortization and interest expense) are added back.