The Financial Reporting Council (FRC) continues raise recurring challenges regarding IFRS 16 and summarises the most frequently raised areas of challenge in its Annual Review of Corporate Reporting.  This, alongside the previously issued IFRS 16 thematic, sets out the FRC's expectations for high-quality reporting in this area and highlights those areas where improvements to reporting quality are needed.  These include:

• The need for clear, entity-specific and not boiler-plate lease accounting policies.  The FRC highlights that such policies should cover all material accounting transactions such as those in relation to sale and leaseback transactions, lease incentives, items outside the scope of IFRS 16 and non-lease components.  Lessors should remember to explain the basis for classifying their leases as operating or financing.
• Improvements in IFRS 16 disclosures.  The FRC has identified that some companies are omitting required IFRS 16 disclosures and highlights that improvements can be made to a number of disclosures including those provided by lessees with significant variable payment features (for example an explanation of the nature and effect of these such as those linked to inflation or sales), those regarding judgements around lease extension or termination options and whether an arrangement meets the definition of a lease and consistency of disclosures with those provided elsewhere in the accounts.  Companies should also consider whether any inflation-related feature requires separation from the host contract and provide an explanation of any significant judgements made.
• Clear explanations of material aspects of the transition adjustments from IAS 17 Leases.
• The need for both lessees and lessors to consider the overall disclosure objective of the standard.  The FRC indicates that information in the notes, together with the information provided in the statement of financial position, statement of profit or loss and statement of cash flows, should enable users to assess the effect of leases on the financial position, financial performance and cash flows.  It indicates that this could include information about variable payment features in leases and disaggregated information about future cash flows.

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