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Your revision guide - IFRS 16 &17

06 November 2017


IFRS 16 is effective for annual reporting periods beginning on or after 1 January 
2019, with earlier application permitted as long as IFRS 15 is also applied. 

The objective of IFRS 16 is to report information that (a) faithfully represents lease transactions and (b) provides a basis for users of financial statements to assess the amount, timing and uncertainty of cash flows arising from leases. To meet that objective, a lessee should recognise assets and liabilities arising from a lease. 
IFRS 16 introduces a single lessee accounting model and requires a
lessee to recognise assets and liabilities for all leases with a term of more than 12 months, unless the underlying asset is of low value. A lessee is required to recognise a right-of-use asset representing its right to use the underlying leased asset and a lease liability representing its obligation to make lease payments. 
A lessee measures right-of-use assets similarly to other non-financial assets (such as property, plant and equipment) and lease liabilities similarly to other financial liabilities. As a consequence, a lessee recognises depreciation of the right-of-use asset and interest on the lease liability. The depreciation would usually be on a straight-line basis. In the statement of cash flows, a lessee separates the total amount of cash paid into principal (presented within financing activities) and interest (presented within either operating or financing activities) in accordance with IAS 7.
Assets and liabilities arising from a lease are initially measured on a present value basis. The measurement includes non-cancellable lease payments (including inflation-linked payments), and also includes payments to be made in optional periods if the lessee is reasonably certain to exercise an option to extend the lease, or not to exercise an option to terminate the lease. The initial lease asset equals the lease liability in most cases.
The lease asset is the right to use the underlying asset and is presented in the statement of financial position either as part of property, plant and equipment or as its own line item.
IFRS 16 substantially carries forward the lessor accounting requirements in IAS 17 Leases. Accordingly, a lessor continues to classify its leases as operating leases or finance leases, and to account for those two types of leases differently.
IFRS 16 replaces IAS 17 effective 1 January 2019, with earlier application permitted. IFRS 16 has the following transition provisions:
• Existing finance leases: continue to be treated as finance leases.
• Existing operating leases: option for full or limited retrospective 
restatement to reflect the requirements of IFRS 16. 

The following summary is based on a near-final draft of IFRS 17. IFRS 17 is expected to be issued shortly after publication of this Pocket Guide.
Until issued, a draft Standard is subject to change. 
IFRS 17 is effective for annual reporting periods beginning on or after 1 January 2021, with earlier application permitted as long as IFRS 9 and IFRS 15 are also applied.

Insurance contracts combine features of both a financial instrument and a service contract. In addition, many insurance contracts generate cash flows with substantial variability over a long period. To provide useful information about these features, IFRS 17:
• combines current measurement of the future cash flows with the recognition of profit over the period that services are provided under the contract;
• presents insurance service results (including presentation of insurance revenue) separately from insurance finance income or expenses; and
• requires an entity to make an accounting policy choice of whether 
to recognise all insurance finance income or expenses in profit or loss or to recognise some of that income or expenses in other comprehensive income. 
The key principles in IFRS 17 are that an entity:
• identifies as insurance contracts those contracts under which the entity accepts significant insurance risk from another party (the policyholder) by agreeing to compensate the policyholder if a specified uncertain future event (the insured event) adversely affects the policyholder;
• separates specified embedded derivatives, distinct investment components and distinct performance obligations from the insurance contracts;
• divides the contracts into groups that it will recognise and measure;
• recognises and measures groups of insurance contracts at:
(i) a risk-adjusted present value of the future cash flows (the fulfilment cash flows) that incorporates all of the available information about the fulfilment cash flows in a way that is consistent with observable market information; plus (if this value is a liability) or minus (if this value is an asset)
(ii) an amount representing the unearned profit in the group of contracts (the contractual service margin).
• recognises the profit from a group of insurance contracts over the period for which the entity provides insurance cover, and as the entity is released from risk. If a group of contracts is or becomes loss-making, an entity recognises the loss immediately;
• presents separately insurance revenue (that excludes the receipt of any investment component), insurance service expenses (that excludes the repayment of any investment components) and insurance finance income or expenses; and
• discloses information to enable users of financial statements to assess the effect that contracts within the scope of IFRS 17 have on the financial position, financial performance and cash flows of an entity. 

IFRS 17 includes an optional simplified measurement approach, or premium allocation approach, for simpler insurance contracts. 

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