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IASB To Bring All Leases Onto Corporate Balance Sheets

by Robert Lee,, London

15 January 2016

On January 13, the International Accounting Standards Board (IASB) issued a new Accounting Standard – IFRS 16 Leases - which will compel companies to report on their balance sheets current lease commitments, which are thought to total USD3.3 trillion.

The IASB, responsible for International Financial Reporting Standards (IFRS), noted that over 85 percent of those commitments are presently categorized as "operating leases," which are disclosed only in the notes to financial statements. Only the remaining "finance leases" are currently reported on the balance sheet.

The Board pointed out 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."

The "arbitrary distinction" between operating and finance leases, it added, has "also meant that investors and others had to estimate the effects of a company's off-balance sheet lease obligations. IFRS 16 solves this problem by requiring all leases to be reported on a company's balance sheet as assets and liabilities."

However, short-term leases (less than 12 months) and leases of low-value assets (such as personal computers) will be exempt from the new requirement.

IASB Chairman Hans Hoogervorst 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 IASB also confirmed that it has also worked in close collaboration with the Financial Accounting Standards Board, which is responsible for US Generally Accepted Accounting Principles (US GAAP), on the development of the new Standard. The two Boards are said to be 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.

It is estimated that almost half of listed companies using IFRS or US GAAP will be affected by the lease accounting changes, and some industry sectors will be more affected than others.

For example, airlines, retailers, and travel/leisure services providers are expected to be most affected, as future payments of off-balance-sheet leases in these industry sectors equate to almost 30 percent of the total assets (on average). For some airlines, the value of their off-balance-sheet leases is equivalent to more than 100 percent of the value of the airline's total assets.

IFRS 16 will be effective from January 1, 2019. Early application is permitted for companies that also apply the recently issued IFRS 15 Revenue from Contracts with Customers.

TAGS: generally accepted accounting principles (GAAP) | business | accounting | aviation | International Accounting Standards Board (IASB) | travel and tourism | financial reporting | retail

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