The new accounting Standard IFRS 16 Leases was issued on 13 January 2016 by the International Accounting Standards Board. It replaces IAS 17 Leases, and will take effect from 1 January 2019. Early application is permitted for companies that also apply IFRS 15 Revenue from Contracts with Customers.
The new accounting Standard IFRS 16 Leases was issued on 13 January 2016 by the International Accounting Standards Board. It replaces IAS 17 Leases, and will take effect from 1 January 2019. Early application is permitted for companies that also apply IFRS 15 Revenue from Contracts with Customers.Companies are currently required to disclose details of their off-balance sheet leases for analysts to use when adjusting published financial statements.
IFRS 16 requires companies acting as the lessee to bring most of their leases on to the balance sheet, meaning that new assets and liabilities must be recognised. The exceptions to this will be short-term leases of up to twelve months and low value items, which are exempted. So, we can expect to see some unusually short leases being introduced.
This will affect a wide variety of sectors, from airlines to retailers. The larger the lease portfolio, the greater the impact. For lessors, the accounting remains similar to those practices applied under IAS 17, i.e. real estate funds are less affected by the new standard.
However, the impacts are not limited to the balance sheet. There will also be changes in accounting over the life of the lease. In particular, companies acting as the lessee will now need to recognise a front-loaded pattern of expense for most leases, even when they pay constant, annual rentals. And the new requirements introduce a stark dividing line between leases and service contracts – the former will be brought on-balance sheet, while service contracts will remain off-balance sheet.
On initial application, the lessee will have the option to either apply IFRS 16 without adjusting his or her comparative information, or to apply the new standard retrospectively, adjusting all prior periods.
Overall, the change will increase transparency and comparability. Under the new standard we will see a company able to assess its own lease liabilities, calculated using a prescribed methodology that all companies reporting under IFRS will be required to follow.
