By Felipe Herranz, Director of the Master in Financial Risk and International Auditing at the IEB; Member of the User Panel Working Group at EFRAG.
EFRAG recently published a draft comment letter related to the Post-Implementation Review of IFRS 16 Leases, issued by the IASB on 17 June 2025, as an exposure draft.
In this short article, I would like to summarize the comments I provided to EFRAG to contribute to the draft comment letter, regarding a specific point that EFRAG itself raises in its draft comment letter: the problem that has emerged in using IFRS 16 to distinguish a lease from an in-substance purchase.
More specifically, in this article I point out the difficulty of distinguishing a finance lease from an in-substance purchase and suggest amendments to IFRS 16 to address that difficulty. This is an element of IFRS 16 that has concerned me since it was issued and has prompted several of my previous papers. In the following points, I try to explain my position on this matter:
THE DIFFERENTIATION BETWEEN FINANCE AND OPERATING LEASES PERSISTS IN IFRS 16
1) Although one of the objectives of IFRS 16 is to cover all leases simultaneously, this is only done in relation to the lessee; since, for the lessor, finance leases continue to be differentiated from operating leases. That is, the differentiation between finance and operating leases persists in the standard.
IFRS 16, IN ITS BASIS FOR CONCLUSIONS, MENTIONS THE PURCHASE IN SUBSTANCE
2) Paragraph BC139 of the basis for conclusions of IFRS 16 says: «The IASB decided not to provide requirements in IFRS 16 to distinguish a lease from a sale or purchase of an asset. There was little support from stakeholders for including such requirements. In addition, the IASB observed that:
a) the accounting for leases that are similar to the sale or purchase of the underlying asset would be similar to that for sales and purchases applying the respective requirements of IFRS 15 and IAS 16; and
(b) accounting for a transaction depends on the substance of that transaction and not its legal form. Consequently, if a contract grants rights that represent the in-substance purchase of an item of property, plant and equipment, those rights meet the definition of property, plant and equipment in IAS 16 and would be accounted for applying that Standard, regardless of whether legal title transfers. If the contract grants rights that do not represent the in-substance purchase of an item of property, plant, and equipment but that meet the definition of a lease, the contract would be accounted for by applying IFRS 16”.
3) In my opinion, this is an erroneous decision, probably due to overlooking a fact: The accounting treatment for finance leases is based precisely on the fact that such leases reflect an in-substance purchase, financed with external resources.
4) Saying that they are treated practically the same in both cases (IAS 16 + IFRS 15 or IFRS 16) not only does not resolve the problem, but actually exacerbates it. If they are the same, they do not merit two classifications, and if they are not, they must be distinguished.
5) What should be done when a transaction meets the criteria for an in-substance purchase and also meets the criteria for a finance lease? And what’s more worrying is that most transactions that meet the requirements for a finance lease also meet the criteria for an in-substance purchase.
6) This confusion leads to several undesirable situations, including:
a) Companies can choose how to present these transactions (which are both finance leases and in-substance purchase of asset) in the manner they prefer, based on their own preferences. For example, considering the different requirements in matters such as presentation, disclosures, breakdowns, variable payments, etc. Additionally, there are also significant differences in the presentation in the cash flow statement, as also mentioned in the draft comment letter published by EFRAG.
b) In turn, this situation leads to a lack of comparability between companies, since one may treat the same transaction as a finance lease and another as in-substance purchase of asset. Additionally, it would also be possible for the lessor to treat the transaction as a finance lease and the lessee as in-substance purchase of asset, or vice versa.
THE MOST APPROPIATE POSSIBLE SOLUTION, IN MY OPINION
7) IFRS 16 should provide a different accounting treatment for finance leases and operating leases; not only for the lessor, but also for the lessee. In fact, it already makes this distinction, although in the current version it only applies to lessors.
8) IFRS 16 should recognize that the in-substance purchase of asset is precisely the main element of the economic substance of a finance lease. Therefore, IFRS 16 should include the in-substance purchase of an asset as a basic element in the definition of a finance lease.
9) IFRS 16 should refer the specific accounting treatment of finance leases to the standards corresponding to purchases financed with external resources, sales, financial debt, etc. in accordance with appropriate standards: IAS 16, IFRS 9, IFRS 15, etc.
10) In this way, IFRS 16 would maintain the current classification criteria, but would only develop the accounting criteria for leases other than finance leases.
11) Regarding leaseback transactions, a distinction should again be made between those transactions in which the preliminary purchase is followed by a finance lease and those in which the preliminary purchase is followed by an operating lease.
12) In leaseback cases in which the preliminary purchase is followed by a finance lease, the accounting treatment should be that of a loan.
13) In leaseback cases in which the preliminary purchase is followed by an operating lease, the criteria currently provided in IFRS 16 could be applied, with any improvements that may be identified.
ALTERNATIVE SOLUTION
14) If the solution proposed in the previous section could not be applied, it would be essential for IFRS 16 to establish precise criteria to distinguish an in-substance purchase from a financial lease, but I believe that this objective would be very difficult to achieve for the reasons explained above.
Estás en Inicio » Actualidad » Blog » Finance Lease under IFRS 16 versus an in-substance purchase