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New Lease accounting

 

Summary: In January 2016, the IASB (International Accounting Standards Board) announced a new standard for lease accounting, IFRS 16 “Leases”. The new lease accounting requires lessees to recognize almost all leases on their balance sheets that reflect the right to use the asset for a period of time and the liability associated with the payment. Under previous standards, lessees classify lease transactions as operating leases or finance leases according to complex rules and tests, and in practice use so-called "Blight Lines", even for economically similar lease transactions. All or nothing was recognized on the balance sheet.

 

The impact on a lessee’s financial reporting, asset financing, IT, systems, processes and controls is expected to be substantial. Many companies lease a vast number of items, including cars, offices, copy machines, retail stores and etc. Therefore, lessees will be greatly affected by the new lease standard.  On the other hand, the lessors’ accounting largely remains unchanged. However, they might see an impact to their business model and lease products due to changes in needs and behaviors.

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Scope Exemption:

Low Value leases: The impact for entities with small leases, such as tablets and personal computers, small items of office furniture and telephones might be less as the IASB offers an exemption for low value assets (assets with a value of $5,000 or less when new). Low value assets meeting this exemption do not have to be recognized on the balance sheet.

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Short-term leases:

IFRS 16 allows you to choose not to recognize leased assets and liabilities with lease terms of 12 months or less. In such cases, a lessee recognizes the lease payments in profit or loss on a straight-line basis over the lease term. The lease term is not just a non-cancellable term in the contract, but it also includes the option after the non-cancellable term if it is reasonably certain to exercise the option to extend the lease term. 

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Leasing standard implementation process: 

Step 1: 

Identification of all items subject to lease agreement

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Step 2:

Determination of lease term (with variable terms), incremental borrowing rate, potential additional lease payments, etc.

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Step 3:

Construction of lease assets (right of use assets) and liabilities worksheet.

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Step 4:

Drafting of lease accounting policy documents

 

Step 5:

Monitoring for any changes, terminations, cancellation of leases and related accounting treatments

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