Will you be the new leases standard’s valentine?

25 January 2016

  I love leases

This week’s guest blogger is Derek Carmichael from Global Accounting Consulting Services in London. Connect to him on LinkedIn.

IFRS 16 is finally here, just in time for Valentine’s Day season.

Like the course of true love, the path to the final standard has not been easy and has shared many of the classic tropes of romantic comedies:

  • The initial clash of opposites in the form of the IASB and FASB, and their differing views on what the new standard should be;
  • The “will they, won’t they” tease as to whether the different viewpoints would come together and allow a new standard to be finalised and released;
  • The hilarious misunderstanding when it looked as though the accounting model for lessors might be changed to match accounting for lessees – and then everyone decided that wasn’t a good idea after all!
  • The eventual realisation that the basic beliefs are not so different after all, and so perhaps they do indeed have a shared future together (well, at least for the definition of a lease).

And so here we are at the conclusion of the story, with a brand new standard as the marriage of all of the proposals and efforts to date.

It’s a standard that perhaps does not meet all of the objectives and suggestions made over the many years of development. As noted, lessor accounting remains an area largely unchanged despite all of the debate. Most importantly, divergence exists between IFRS and US GAAP on the impact on the income statement of lessees.

But, as the culmination of an extended courtship, the new standard does represent some sizeable shifts away from what existed before.

So, what is there to love about the new leases standard (or at least be good friends with it)?

  • Lessees will recognise nearly all leases on their balance sheet in the form a right-of-use asset and associated lease liability (well, at least Sir David Tweedie will love this – at last that airplane will appear on someone’s balance sheet!);
  • Some practical reliefs are available in the form of exemptions for short-term and low-value asset leases;
  • The transition rules allow a practical expedient that contracts entered into before 1 January 2019 need not be reassessed as to whether they contain a lease (a “grandfather” lending a helping hand in that initial year of the marriage);
  • More help in the choice to either apply the new standard in full retrospectively, or take a simplified approach to the measurement of the right-of-use asset and lease liability (including no restatement of comparatives);
  • A range of illustrative examples to show how the key principles of the standard can be applied to practical scenarios for a variety of different industries.

The hope is that the new standard will deliver a more consistent approach to lease accounting, providing a better reflection on the balance sheet of an entity’s rights and obligations and more transparent information for users in the form of enhanced disclosure requirements.

But of course, unlike the movies, the story does not end here. We will get to see how this new marriage weathers the trials of real-life, as preparers deal with the practical challenges of implementation. Questions over the interpretation and meaning of paragraphs will arise as they begin to be applied to specific sets of facts and circumstances. A further trial will be how the new standard gets on with its in-laws, in the form of IFRS 15 Revenue. And the strength of the marriage will no doubt be tested as ideas on structuring agreements to achieve preferred accounting outcomes emerge.

In terms of whether the new standard is one which will last – who can say?

However, that is for the future and perhaps, at least for now, we should be optimistic about the fact that a final standard is here to work with, and we finally have an end to the debate and uncertainty.

Do you love the new leases standard? Tell us below.


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