Leases were classified in two ways. A finance lease — one that transferred substantially all the risks and rewards of ownership — was recognised on the balance sheet as an asset and a liability (IAS 17.20). Every other lease was an operating lease, kept off the balance sheet, with the rent charged to profit or loss on a straight-line basis over the term (IAS 17.33). The classification relied on judgment (IAS 17.8).
The operating-lease model let companies keep large lease obligations off their balance sheets — airlines, retailers and others carried billions in commitments visible only in the notes. Investors couldn't see the true leverage and had to estimate it themselves, which hurt comparability. The IASB estimated listed companies held around US$3.3 trillion of off-balance-sheet lease commitments. IFRS 16 was issued in 2016, effective 1 January 2019, to bring them into view.
The operating/finance split is removed for lessees — nearly every lease goes on the balance sheet under a single model. At commencement you recognise a right-of-use asset and a lease liability (IFRS 16.22). The liability is the present value of the lease payments, discounted at the rate implicit in the lease or, if that isn't readily determinable, your incremental borrowing rate (IFRS 16.26). The ROU asset is that liability plus payments made up front, initial direct costs and restoration, less incentives (IFRS 16.24). Short-term (≤12 months) and low-value leases are exempt (IFRS 16.5).