New accounting rules for leases on the horizon
The International Accounting Standards Board (IASB) issued IFRS 16 Leases in January 2016. IFRS 16 sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract, i.e. the customer (‘lessee’) and the supplier (‘lessor’). IFRS 16 is effective from 1 January 2019. A company can choose to apply IFRS 16 before that date but only if it also applies IFRS 15 Revenue from Contracts with Customers. IFRS 16 replaces the previous leases Standard, IAS 17 Leases, and related Interpretations.
So what does this mean for those who have entered into leases?
The new statement means that leases no longer need to be classified as either operating or financial leases and instead there is a single lessee accounting method.
A lessee is required to recognise:
(a) Assets and liabilities for all leases with a term of more than 12 months, unless the underlying asset is of low value; and
(b) Depreciation of lease assets separately from interest on lease liabilities in the income statement.
A lessor’s accounting practice does not change and so continues to classify the lease as either operating or financial and account for the transaction in the same way as before.
For our clients offering leases, this does not have any direct impact; however it does have a material indirect impact on how our clients’ client (lessee) account for their leases. In particular, the full liability and asset are reflected ‘on balance sheet’ whereas before it was ‘off balance sheet’. Furthermore, the operating expense must be split between interest and depreciation.
Should you require any further information on this topic, please contact:
CEO: Xpertek Group