The International Accounting Standards Board (IASB) has issued a new accounting standard: IFRS 16 Leases. This is said to be a major revision of how companies account for leases, replacing accounting requirements introduced more than 30 years ago, which the IASB said were no longer fit for purpose.

Leasing is an important source of financing for many corporations but the old lease accounting standard (IAS 17 Leases) does not give a transparent picture of a company’s lease assets and liabilities, particularly for the airline, retail and transport sectors.

Lack of transparency

According to the board, more than 85 per cent of lease commitments, worth US$2.81 trillion, do not appear on listed company balance sheets (for companies using IFRS Standards or US GAAP). The reason is that leases are currently 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 not only makes it difficult for investors to compare companies but it also meant that investors and others have 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.

Leases brought onto balance sheet

IFRS 16 will require 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.”

IASB chairman explains new standard

The IASB has also released a video in with Hans Hoogervorst introduces the standard, and discusses the new requirements.

IFRS 16 will take effect from 1 January 2019. Early application is permitted for companies that also apply IFRS 15 Revenue from Contracts with Customers.

The IASB has also published a separate Effects Analysis, which outlines the costs and benefits of the standard. It clearly demonstrates the need for the standard and that the benefits outweigh the costs.