ACCA Strategic Business Reporting (SBR) Practice Exam

What are the two classifications for leases under IFRS 16?

1. Operating and Fixed leases

2. Finance and Operational leases

3. Operating and Finance leases

4. Short-term and Long-term leases

The correct answer is: Operating and Finance leases

Under IFRS 16, leases are classified into two main categories: operating leases and finance leases. This distinction is significant because it impacts how the leases are reported in the financial statements. Finance leases, under IFRS 16, are leases that transfer substantially all of the risks and rewards incidental to ownership of an underlying asset to the lessee. This type of lease requires the lessee to recognize the leased asset on their balance sheet, along with a corresponding lease liability based on the present value of the future lease payments. This reflects the economic reality that the lessee is effectively using the asset as if they own it. On the other hand, operating leases do not transfer substantially all of the risks and rewards of ownership to the lessee. Under IFRS 16, operating leases are treated differently than under previous standards. Now, even operating leases necessitate recognition on the balance sheet, with the lessee recording a right-of-use asset and a corresponding lease liability, thus reflecting the commitment and right to use the underlying asset. The other classifications mentioned, such as fixed leases and short-term vs. long-term leases, do not align with the framework provided by IFRS 16. The focus is primarily on whether the lease is an operating or finance