MFRS 16 Leases Malaysia 2025: A Practical Guide

MFRS 16 in 2025: A Cornerstone of Modern Financial Reporting in Malaysia

Since its mandatory adoption in 2019, MFRS 16 Leases has fundamentally reshaped the financial statements of Malaysian businesses. By requiring most leases to be brought onto the balance sheet, the standard has introduced a new level of transparency to corporate financial reporting. In 2025, a solid understanding and robust application of MFRS 16 remain a critical aspect of financial compliance and governance.

The Core Principle: The "Right-of-Use" Model

The most significant change introduced by MFRS 16 was the elimination of the distinction between operating leases and finance leases for lessees. Under the new "right-of-use" model, a lessee must recognize:

A right-of-use asset, which represents its right to use the underlying leased asset.
A lease liability, which represents its obligation to make lease payments.

This single-model approach ensures that a company's balance sheet provides a more complete picture of its assets and liabilities.

A Practical Guide to Applying MFRS 16

Step 1: Identifying a Lease

A contract is, or contains, a lease if it conveys the right to control the use of an identified asset for a period of time. This involves assessing whether the customer has both the right to obtain substantially all the economic benefits from the use of the asset and the right to direct its use.

Step 2: Initial Recognition and Measurement

At the commencement of the lease, the lessee measures:

The lease liability at the present value of the future lease payments.
The right-of-use asset at the amount of the lease liability, plus any initial direct costs and estimated restoration costs.

Step 3: Subsequent Measurement

After initial recognition, the accounting is as follows:

The lease liability is increased to reflect the accretion of interest and reduced by the lease payments made.
The right-of-use asset is typically depreciated on a straight-line basis over the lease term.

Step 4: Applying the Exemptions

MFRS 16 provides two practical exemptions that can simplify the accounting for certain leases:

Short-term leases: Leases with a term of 12 months or less.
Low-value assets: Leases of assets that have a low value when new (typically considered to be around USD 5,000 or less).

If a company elects to use these exemptions, the lease payments are simply recognized as an expense on a straight-line basis over the lease term.

Recent Amendments and Clarifications

While the core principles of MFRS 16 are now well-established, the Malaysian Accounting Standards Board (MASB) continues to issue amendments to clarify specific aspects of the standard. A notable recent amendment, effective from January 1, 2024, provides specific guidance on how to subsequently measure the lease liability in a sale and leaseback transaction.

Navigating the Implementation Challenges

Despite being in effect for several years, MFRS 16 continues to present challenges for many Malaysian companies. These include:

Complexity: The standard is complex and requires significant professional judgment, particularly in determining the lease term and the appropriate discount rate.
Data Collection: Identifying all lease contracts within an organization and extracting the necessary data can be a significant undertaking.
Impact on Financial Ratios: The on-balance sheet recognition of leases can have a material impact on key financial ratios, such as gearing and EBITDA, which may affect loan covenants and performance metrics.
System and Process Changes: The implementation of MFRS 16 often requires changes to a company's IT systems, internal controls, and business processes.

Conclusion

MFRS 16 has brought a new level of transparency and comparability to financial reporting in Malaysia. While the implementation can be challenging, a robust and well-documented approach to lease accounting is essential for ensuring compliance and providing stakeholders with a true and fair view of a company's financial position. In 2025 and beyond, a strong grasp of MFRS 16 will remain a hallmark of a high-quality finance function.