What is IFRS 16? Simple Explanation
Think of it in everyday terms: Let's say you're going to rent a car for 2 years. Under the old rules, you would just say "I paid 5,000 TL rent this month." But IFRS 16 says: "No, you're going to use that car for 2 years. So record it as if you bought it."
IFRS 16 is one of the international financial reporting standards. It requires companies to record leased assets (office, car, machinery) on their balance sheet as if they had purchased them. This makes the company's real debts and assets more transparent.
✓ Who should use it?
- Publicly traded companies (public companies)
- Companies doing international reporting
- Large-scale companies
Note: Applicability follows the entity's financial reporting framework and local requirements; company size alone does not decide it.
📊 What is Right-of-Use Asset?
Simply: The value of what you leased for yourself.
📌 Real-life example:
- •You leased an office for 1,000 TL per month for 24 months
- •You have the right to use this office for 2 years
- •This right's value: 23,388 TL (at today's money value)
Just like when you buy a computer you say "I own this computer, I have an asset", the office you lease becomes an asset for you.
How is Right-of-Use Asset Calculated?
Very simple 3 steps:
- 1Add up all future rents
- 2Convert to today's money value (discount)
- 3Result = Your right-of-use asset 🎯
💳 What is Lease Liability (Your Debt)?
Simply: The present value of all future rents you will pay.
Let's explain with an example:
- ▸You will pay 1,000 TL each month for 2 years
- ▸24 months × 1,000 TL = 24,000 TL
- ⚠️But be careful! 1,000 TL today and 1,000 TL in a year are not the same value
- ▸Due to inflation, interest etc., present value: 23,388 TL
✅ This 23,388 TL becomes your debt (lease liability).
💰 What Does Discount Rate Mean?
In the simplest terms: The difference between money's value today and in the future.
☕ Coffee example:
- •A coffee is 50 TL today
- •In a year, the same coffee will be 60 TL
- 📊The difference is 20% (think of it like discount/interest rate)
Our calculator uses 8% annual interest. This means: "Money loses 8% value each year" or "Think of it as if you're taking a loan at 8% interest for this rent."
How is Discount Rate Determined?
Use the interest rate implicit in the lease when it can be readily determined; otherwise use the lessee's incremental borrowing rate. The latter is lease-specific and reflects a similar term, security, required funds/value and economic environment; the Standard does not prescribe a generic market percentage.
📉 What is Amortization? (Value Depreciation)
Simply: Everything wears out over time and loses value. We call this amortization.
📱 Phone example:
- •You bought a phone for 30,000 TL
- •You'll use it for 3 years
- •It loses 10,000 TL value each year
- ✓This value loss = Amortization
Same for leases:
In the office example above, your right-of-use asset loses 974.52 TL value each month. It becomes zero after 24 months - because your lease contract ends.
📐 Monthly Amortization Calculation
Formula: Total Value ÷ Number of Months = Monthly Amortization
Example: 23,388 TL ÷ 24 months = 974.52 TL/month
🧮 How is Interest Expense Calculated?
Simply: Interest added on top of debt, just like on a credit card.
💳 Credit card example:
- •You have 10,000 TL debt
- •2% interest per month
- ▸First month: 10,000 × 0.02 = 200 TL interest
- ▸After paying 5,000 TL: 5,000 × 0.02 = 100 TL interest
Lease interest works exactly the same:
- ▸ First month your debt is high → Interest high (150 TL)
- ▸ Last month your debt is low → Interest low (8 TL)
📊 How to Read the Monthly Calculation Table?
Each month the following happens:
- 1Liability Opening: How much debt you have at the beginning of the month
- 2Interest Expense: Interest added to your debt that month
- 3Lease Payment: Money actually leaving your pocket
- 4Liability Closing: Your remaining debt at the end of the month
- 5Amortization: Value loss of your asset
📌 Example - Month 1:
| Debt at month start | 23,388 TL |
| Interest added | +150 TL |
| You paid rent | -1,000 TL |
| Debt at month end | 22,539 TL |
| Asset value loss | -974 TL |
📑 What Do Balance Sheet and Income Statement Mean?
Balance Sheet (Company's Snapshot)
Simply: A snapshot of the company on a given day. "What do you have today, how much debt do you have?"
What happens with IFRS 16?
- ✓To your assets: +23,388 TL (right-of-use)
- ✓To your liabilities: +23,388 TL (lease liability)
Income Statement (Profit/Loss Account)
Simply: "How much money did you make this year, how much did you spend?"
Year 1 total expense: 13,131 TL
- • Amortization: 11,694 TL
- • Interest: 1,437 TL
Year 2 total expense: 12,243 TL
- • Amortization: 11,694 TL
- • Interest: 549 TL
🚫 IFRS 16 Exemptions - Who is Exempt?
You don't have to apply IFRS 16 for some leases:
1. Short-term leases (12 months or less at commencement; no purchase option)
- ✓Example: 6-month vehicle lease
- ✓Example: Seasonal warehouse lease
2. Low-value assets (underlying asset's value when new; no fixed monetary threshold)
- ✓Example: Copy machine
- ✓Example: Office furniture
- ✓Example: Computer
When the recognition exemption is elected: Lease payments are recognised as an expense on a straight-line or another systematic basis over the lease term.
🏢 Which Sectors Were Most Affected by IFRS 16?
Sectors with many leases:
Dozens of branch rents
Aircraft leases
Location rents
Vehicle and warehouse rents
Branch rents
Note: Balance sheets changed significantly in these sectors.