IFRS 16—a new lease of life?

IFRS 16—a new lease of life?

What impact will the new accounting standard have on lenders and practitioners? Brian O'Donovan, partner at KPMG, comments on the changes introduced by the new International Accounting Standards Board (IASB) accounting standard, notably the on-balance sheet accounting for lessees.

Original news

The New International Financial Reporting Standards report ‘Leases’ (IFRS 16), released by the IASB, has been created to revise the way in which companies account for leases, the regulator announced. IFRS 16 will come into effect on 1 January 2019, though early application is permitted for companies that also apply IFRS 15‘Revenue from Contracts with Customers’.

Why has the IASB decided to create a new accounting standard?

The IASB’s new lease accounting standard—IFRS 16—requires lessees to recognise most leases on-balance sheet. It also requires lessees to disclose more information about their lease obligations.

The IASB believes this change will make financial statements more useful to users. At present, most analysts adjust published financial statements for lease transactions. The new accounting means analysts can see a company’s own calculation of its lease liabilities, calculated using a common methodology. The additional disclosures will allow an analyst to interrogate those liabilities further.

The new requirements take effect in 2019, though companies can choose to apply them earlier.

What are the major changes?

The number one change is on-balance sheet accounting for lessees. In effect, a lessee will treat each lease as the purchase of an asset, financed by the future lease payments.

As a result, a lessee will recognise an interest-bearing liability each time it enters into a lease. This liability will be calculated as the present value of the future lease payments. At present, a lessee only recognises a financial liability in this way if the lease is a finance lease, ie if the lease is economically similar to an outright purchase of the asset. At the same time, a lessee will recognise an asset for its right to use the items that it leases. As a result, lessees will appear more asset-rich, but also more

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About the author:

Meet Neil:

1. Banking and finance lawyer with particular experience in asset finance

2. Likes Wales, wine, sport and anything else that means he doesn’t have the time to have to write personal information about himself

3. Thinks the law is a far broader topic than any of his family and friends who do not work in law

Neil specialises in banking and asset finance transactions with a particular emphasis in finance for shipping, aviation and renewable energy, as well as providing corporate transactional support. He trained and qualified at TLT LLP and spent a further four years working as a finance solicitor, acting for borrowers and lenders before joining the Asset Finance team at DLA Piper (UK) LLP.