IASB issues standard on lease accounting
FINANCIAL REPORTING INSIGHTS |
The International Accounting Standards Board (IASB) recently issued International Financial Reporting Standard (IFRS) 16, Leases, which provides major revisions in the way lessees currently account for leases under existing International Accounting Standard 17, Leases. Most notably, IFRS 16 now requires lessees to recognize most leases on the balance sheet, instead of categorizing them as either “finance” leases (which currently are reported on the balance sheet) or “operating” leases (which currently are disclosed in the notes to the financial statements). Lessors’ accounting for leases remains substantially unchanged.
Under IFRS 16, the lease liability will be measured at the present value of the lease payments to be made over the lease term. The right-of-use asset initially will be measured at the amount of the lease liability, adjusted for lease prepayments, lease incentives received, the lessee’s initial direct costs and an estimate of restoration, removal and dismantling costs. Lessees may make an accounting policy election to apply operating lease accounting to leases with a lease term of 12 months or less.
IFRS 16 was issued as a result of the IASB’s joint project on leases with the Financial Accounting Standards Board (FASB). The FASB is expected to issue a final Accounting Standards Update (ASU) on leases in the latter half of February 2016. While the forthcoming ASU and IFRS 16 will be converged in many respects, there will also be many key issues on which they will not be converged, such as the lessee accounting model.
IFRS 16 applies to an entity’s first annual IFRS financial statements for a period beginning on or after January 1, 2019 with earlier application permitted for entities that also apply IFRS 15, Revenue from Contracts with Customers.