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IASB issues new leasing standard

  • IFRS - IASB Image

Jan 13, 2016

On January 13, 2016, the International Accounting Standards Board (IASB) published a new Standard, IFRS 16, Leases. The new Standard brings most leases on-balance sheet for lessees under a single model, eliminating the distinction between operating and finance leases. Lessor accounting however remains largely unchanged and the distinction between operating and finance leases is retained.

The IASB has now issued a final standard with a single lessee accounting model, whereas the FASB has decided to have a dual lessee accounting model in their forthcoming standard – both however require assets and liabilities to be recognized (with limited exceptions).

Overview of the new accounting model in IFRS 16

Under IFRS 16, a lessee recognizes a right-of-use asset and a lease liability. The right-of-use asset is treated similarly to other non-financial assets and depreciated accordingly. The liability accrues interest. This will typically produce a front-loaded expense profile (whereas operating leases under IAS 17 would typically have had straight-line expenses).

A front-loaded expense profile arises, for example, when a lessee recognizes:

  1. a right of use (ROU) asset which is typically amortized on a straight line basis; and
  2. a liability to pay lease rentals, which would be accounted for like a mortgage loan with higher interest charges in the early years.

The combined effect is a front-loaded expense in the income statement, even if the lessee pays the same amount of rent each period.

The lease liability is initially measured at the present value of the lease payments payable over the lease term, discounted at the rate implicit in the lease if that can be readily determined. If that rate cannot be readily determined, the lessee shall use their incremental borrowing rate.

Identifying a lease

A contract is, or contains, a lease if it conveys the right to control the use of an identified asset for a period of time in exchange for consideration. Control is conveyed where the customer has both the right to direct the identified asset’s use and to obtain substantially all the economic benefits from that use.

Recognition exemptions

Instead of applying the recognition requirements of IFRS 16 described above, a lessee may elect to account for lease payments as an expense on a straight-line basis over the lease term or another systematic basis for the following two types of leases:

  • leases with a lease term of 12 months or less and containing no purchase options – this election is made by class of underlying asset; and
  • leases where the underlying asset has a low value when new (such as personal computers or small items of office furniture) – this election can be made on a lease-by-lease basis.

Effective date

IFRS 16 is effective for annual reporting periods beginning on or after January 1, 2019. Earlier application is permitted if IFRS 15, Revenue from Contracts with Customers, has also been applied.

Status of FASB's new standard on lease accounting

The Financial Accounting Standards Board (FASB) is currently finalizing its new leases standard and is expected to issue it in February 2016. We expect the FASB’s new standard on lease accounting will be effective for public business entities for annual periods beginning after December 15, 2018 (i.e., calendar periods beginning on January 1, 2019), and interim periods therein. For all other entities, the standard would be effective for annual periods beginning after December 15, 2019 (i.e., calendar periods beginning on January 1, 2020), and interim periods thereafter. Early adoption would be permitted for all entities.

Additional information on the IASB's Web site:

Review also:

Correction list for hyphenation

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