The International Financial Reporting Standards (IFRS) 16 have become the go-to standard for the accounting of lease contracts. The standard applies to both lessees and lessors and has drastically changed the way leases are accounted for. In this article, we will discuss the lease contract definition according to IFRS 16.

According to IFRS 16: Lease is defined as a contract, or part of a contract, that conveys the right to use an asset for a period of time in exchange for consideration. The asset can be tangible or intangible, and can include property, plant, and equipment, vehicles, or other assets.

The definition of lease contract includes the following elements:

1. Right to Use an Asset: The lease contract should convey the right to use an asset. This means that the lessee has control over the asset for a period of time, and can use it for their benefit.

2. Period of Time: There should be a defined period of time for which the lessee has the right to use the asset. This can be a fixed period or a period that can be extended or terminated by either party.

3. Consideration: The lessee should pay consideration to the lessor in exchange for the right to use the asset. This can be in the form of lease payments or other forms of consideration.

4. Control: The lessee should have control over the use of the asset. This means that they should have the ability to direct the use of the asset and should have the right to obtain the economic benefits from its use.

Under IFRS 16, lease contracts are classified as either finance leases or operating leases. Finance leases are leases that transfer substantially all the risks and rewards of ownership of an asset to the lessee. Operating leases are leases that do not transfer substantially all the risks and rewards of ownership of an asset to the lessee.

The lease contract definition according to IFRS 16 is important because it determines how a lease is accounted for. Lessees are required to recognize a right-of-use asset and lease liability for all lease contracts, regardless of whether they are finance leases or operating leases. This has significant implications for lessees, including increased transparency and comparability in financial reporting.

In summary, IFRS 16 establishes a new lease contract definition that is more comprehensive and inclusive. It includes specific elements that must be present for a contract to be considered a lease, and it provides a framework for how leases should be accounted for. This standard has significant implications for lessees and lessors, and it is important that both parties understand the changes and how they will impact their financial reporting.