Major reforms to global lease accounting
The IASB has published IFRS 16 'Leases', completing its long-running project to overhaul lease accounting.
IFRS 16 will require lessees to account for leases 'on-balance sheet' by recognising a 'right-of-use' asset and a lease liability. For many businesses, however, exemptions for short-term leases and leases of low value assets will greatly reduce the impact.
The main changes are summarised below:
Who is affected?
- Entities that lease assets as a lessee or a lessor.
What's the impact on lessees?
- All leases will be accounted for 'on-balance sheet', other than short-term and low value asset leases;
- lease expense will typically be 'front-loaded';
- lease liability will exclude:
- option periods unless exercise is reasonably certain;
- contingent payments that are linked to sales/usage and future changes in an index/rate.
What's the impact on lessors?
- Only minor changes from the current Standard – IAS 17.
Are there other changes?
- A new definition of a lease will result in some arrangements previously classified as leases ceasing to be so, and vice versa;
- new guidance on sale and leaseback accounting;
- new and different disclosures.
When are the changes effective?
- Annual periods beginning on or after 1 January 2019;
- various transition reliefs;
- early application is permitted if IFRS 15 'Revenue from Contracts with Customers' is applied.
This special edition of IFRS News explains the key features of the new leasing Standard and provides practical insights into its application and impact.