FRC tells companies to improve IFRS 16 Leases disclosures

Companies applying the new standard on lease accounting are not providing sufficient information on its impact, according to the Financial Reporting Council’s (FRC) review of the first year of implementation of IFRS 16 Leases

The regulator looked at the interim reports of 20 companies applying IFRS 16 for the first time. While it identified a number of examples of best practice, which tended to be those disclosures that were tailored to the company’s circumstances and provided more than the minimum requirements, it said more could be done to show the effects of the new standard.

The FRC says companies should include information about key accounting judgments made, for example on the identification of lease, or on assessing their length. There should be clearer explanations of the specific transition choices made, as well as a detailed reconciliation between the operating lease commitment under the previous standard and the new lease liability, with clear explanations for reconciling items.

In addition, where companies use alternative performance measures to help users of the accounts to understand the effect, these measures should be properly labelled, reconciled and explained, and not given more prominence than the IFRS measures.

The FRC said that where the adoption of IFRS 16 had a significant impact for a company, it expects management to consider the requirements of IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors, as well as the transition disclosure requirements of IFRS 16. It also expects management to ensure that the disclosures are of a sufficient level of granularity as to allow users to understand fully the extent to which IFRS 16 has had an impact on the business.

The review stated: ‘We encourage companies to carefully consider the findings of this review when determining the extent of disclosures included within their next annual reports. Companies should aim to ensure not only that mandatory disclosure requirements have been met, but that they have addressed the disclosure objective of the standard.

‘Starting with this objective will go a long way to ensuring that readers understand the impact of IFRS 16 on the company.’

IFRS 16 brings leases on to the balance sheet for the first time, and has had a major impact on a number of sectors, including transport and retail, where a high number of leases are held.

IFRS 16 Thematic Review: Review of Interim Disclosures in the First Year of Application

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