New Accounting standards for leases introduced

Published on 10 January 2019

The International Accounting Standard Board (IASB) has introduced a new lease accounting standard, IFRS 16. It will be effective for annual reporting periods beginning on or after 1 January 2019.

What is happening?

IFRS 16’s objective is to promote reporting that accurately represents the amount, timing and cash flows arising from leases.

Why does it matter?

IFRS 16 introduces the following changes:

  • It eliminates the distinction between “operating” and “finance” leases by requiring all leases to be recorded on the balance sheet as assets and liabilities (subject to limited exemptions).

  • Two exemptions are recognised (and are dealt with using a simplified approach). Firstly, you do not have to report assets and liabilities for leases where the underlying asset is of “low value”. Secondly, you do not have to report leases where the term is for 12 months or less.

  • All lessors will be required to disclose additional information about their leasing activities, in particular surrounding their exposure to residual value risk (ie the possibility that a lease can only be re-leased at a price below the asset’s residual value).

  • All leases reported on the balance sheet will have to be accounted for with a separate presentation of depreciation and interest.

  • “Variable” and “optional” lease payments are simplified. Inflation-linked payments are included in calculating assets and liabilities, but variable payments linked to sales or usage are not. Furthermore, optional payments are only included when it is reasonably certain that the lessee will extend the lease beyond the cancellation period.

What action should you take?

Companies should obtain advice on how this may affect any financial covenants contained in existing facility agreements (and other finance documents). These changes may not change the company’s ability to comply with their existing agreements but it may create an administrative burden if they are required to adjust their accounts to reflect previous accounting standards.
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