The International Accounting Standards Board® (the Board) today issued a new accounting Standard, called IFRS 16 Leases. It replaces accounting requirements introduced more than 30 years ago that are no longer considered fit for purpose and is a major revision of the way in which companies account for leases.
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, particularly for industries such as the airline, retail and transport sectors.
Listed companies using IFRS Standards or US GAAP are estimated to have around US $3.3 trillion of lease commitments; over 85 per cent of which do not appear on their balance sheets*. That is because leases to date have been 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 somewhat arbitrary distinction made it difficult for investors to compare companies. It also meant that investors and others had 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. IFRS 16 solves this problem by requiring all leases to be reported on a company’s balance sheet as assets and liabilities…