IASB revamps standard for leasing

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The International Accounting Standards Board (IASB) today (13 January 2016) issued a new accounting standard, called IFRS 16 Leases, which will be introduced in January 2019.

IFRS 16 replaces accounting requirements introduced more than 30 years ago that the IASB says are no longer considered fit for purpose and is a major revision of the way in which companies account for leases.

It commented that leasing provides an important and flexible source of financing for many companies. However, the old lease accounting Standard (IAS 17 Leases) “makes it difficult for investors and others to get an accurate picture of a company’s lease assets and liabilities, particularly for industries such as the airline, shipping and retail sectors.”

Listed companies using IFRS Standards or US generally accepted accounting principles (GAAP) have an estimated US$3.3 trillion of lease commitments; over 85% of which do not appear on their balance sheets. That is because leases to date have been categorised as either ‘finance leases’ (which are reported on the balance sheet) or ‘operating leases’ (which are disclosed only in the notes to the financial statements).

“This somewhat arbitrary distinction made it difficult for investors to compare companies,” says the IASB. “It also meant that investors and others had to estimate the effects of a company’s off balance sheet lease obligations, which in practice often led to overestimating the liabilities arising from those obligations.

“IFRS 16 solves this problem by requiring all leases to be reported on a company’s balance sheet as assets and liabilities.”

“These new accounting requirements bring lease accounting into the 21st century, ending the guesswork involved when calculating a company’s often-substantial lease obligations,” added Hans
Hoogervorst, IASB chairman.

“The new standard will provide much-needed transparency on companies’ lease assets and liabilities, meaning that off balance sheet lease financing is no longer lurking in the shadows. It will also improve comparability between companies that lease and those that borrow to buy.”

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