Over recent months, we have held back from providing updates on the continued delay in announcement of the lease accounting rule changes. However, this week, the long-awaited announcement finally emerged!
The International Accounting Standards Boards have now issued a new accounting Standard – IFRS 16 Leases. It replaces accounting requirements introduced more than 30 years ago that are no longer considered fit for purpose and is a major revision of the way in which companies account for leases.
Listed companies using IFRS Standards or US GAAP are estimated to have around US$3.3 trillion of lease commitments; over 85 per cent 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.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.
Hans Hoogervorst, IASB Chairman, commented:
These new accounting requirements bring lease accounting into the 21st century, ending the guesswork involved when calculating a company’™s often-substantial lease obligations.
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.
The new Leases Standard has been subjected to multiple rounds of public consultation and extensive Board-level deliberation, all of which has been conducted in public and webcast.
The IASB has also worked in close collaboration with the US Financial Accounting Standards Board (FASB) on the development of the new Standard. The two Boards are aligned on the central issue of bringing leases onto balance sheets, and on the definition of a lease and how lease liabilities should be measured.