Overview

Under the new Standard, IFRS 16, Leases, 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: (i) a right of use (ROU) asset which is typically amortized on a straight line basis; and (ii) 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.

With respect to 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.

The new Standard includes certain 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: (i) 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 (ii)  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.

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.

Other developments

June 2016

In June 2016, the AcSB included IFRS 16 in the CPA Canada Handbook.

January 2016

On January 13, 2016, the 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 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. The AcSB currently expects to include IFRS 16 in the CPA Canada Handbook during Q2/2016.

December 2015

In December 2015, the IASB announced that the final standard is expected on January 13, 2016.

November 2015

On November 11, 2015, the FASB decided that the upcoming US lease standard will be effective for public companies with fiscal years (and interim periods within those fiscal years) beginning on or after December 15, 2018. For private companies, the standard will be effective one year later. Early adoption will be permitted for all companies and organizations upon issuance of the standard. It is expected that the final standard will be published in early 2016. While the IASB requires early adopters to adopt the revenue standard at the same time as the lease standard, the FASB decided to allow for independent adoption. While the final IASB and the FASB are not expected to be fully converged, both standards will require leased obligations to be added to the statement of financial position.

October 2015

On October 29, 2015, the IASB staff published a short project update providing an overview of how a lease will be defined in the IASB's new standard on leases. It also includes a working draft of the application guidance and accompanying illustrative examples to be included in the forthcoming standard on the definition of a lease.

On October 21, 2015, the IASB voted on an effective date of January 1, 2019; with early application permitted but only if the entity is also applying IFRS 15, Revenue from contracts with customers.

March 2015

On March 16, 2015, the IASB published a document that provides an overview of (i) the likely practical effects of the new standard on leases and (ii) the similarities and differences between the IASB's requirements and those of the FASB.

February 2015

On February 24, 2015, in the interests of providing feedback to stakeholders, the IASB staff published a short Project Update: Definition of a Lease (February 2015). This document explains how a lease would be defined in the new Leases Standard based on the IASB’s decisions in redeliberations.

August 2014

On August 7, 2014, the IASB staff published a document that provides an update on the most important tentative decisions reached on the Leases project during the first half of 2014. The document also explains the IASB’s reasons for reaching those decisions and the remaining work to be done in completing the project.

August 2013

On August 8, 2013, the AcSB issued a revised ED that corresponds to the IASB’s 2013 ED.

May 2013

On May 16, 2013, the IASB and the FASB published for public comment a re-exposure draft (the 2013 ED) of joint proposals to improve the reporting of lease contracts.

July 2011

On July 2011, the Boards unanimously agreed to re-expose the revised proposals for a common Leases standard. The main areas of change include the lessee accounting model-specifically, how the lessee recognizes lease expense in its statement of comprehensive income for some leases; the lessor accounting model; the accounting for variable lease payments and renewal options; and the definition of a lease.

October 2010

In October 2010, the AcSB issued an ED that corresponds to the IASB’s 2010 ED.

August 2010

On August 17, 2010, the IASB and the FASB published for public comment an ED of joint proposals to improve the reporting of lease contracts (the 2010 ED).