The International Accounting Standards Board (IASB) has issued implementation advice for IFRS 16 Leases, a year after the leases standard was finalised, which will see radical change to the taxation treatment and accounting of leases on balance sheets, effective January 2019
As the comparative period for the new IFRS 16 leasing standard draws closer, IASB accounting experts set out tips and advice for companies that have not yet started their transition to the new accounting standard, warning companies to leave plenty of time to prepare for implementation.
There are several options available for companies to choose between when making the transition from the old Leases Standard, IAS 17, to the new standard, IFRS 16. Some of these may have significant cost savings. Considering all options as early as possible will allow companies to make the best choices for their lease portfolio.
Some of the practical steps required for implementing the new Standard may be quite time consuming. For example, for companies with a large volume of leases, it may take some time to identify and locate all their lease contracts.
Gary Kabureck, IASB member, said: ‘One reason the Board provided a three-year implementation period is because many companies told us they would need that time to implement the requirements. We are now a third of the way into the implementation period and if companies have not yet started their implementation activities, they need to do so soon.
‘Those companies that have already started are finding that there are some time-consuming steps to be taken in the early stages. For example, some companies with large volumes of leases are finding that the initial step of identifying and locating all of their lease contracts may in itself be a substantial task. This is particularly true for companies that do not maintain lease records centrally.’
Companies will have to determine an appropriate discount rate for each lease to meet the IFRS 16 requirements. Companies could benefit significantly from an early consideration of their approach to determining discount rates.
As IFRS 16 requires much of the information that was previously disclosed in the notes to financial statements to appear on the balance sheet, investors may expect that lease liabilities on the balance sheet under IFRS 16 will reflect the discounted amount of lease commitments disclosed in the notes section under the previous Standard.
Making sure that the disclosures are as complete as possible in the period between now and the application of the new Standard, will help avoid unnecessary complications.
Early communication with investors to ensure they are well aware of the changes coming to a company’s balance sheet is important to manage expectations.
Stephen Cooper, IASB member, said: ‘If companies have concerns about their existing operating lease commitment note, they should resolve these concerns now. Ensuring that lease disclosures are complete and robust before 2019 will avoid unnecessary complications on transition or surprises for users of financial statements.
‘It is also a good idea for companies to communicate with investors and other stakeholders about the effects of IFRS 16 sooner rather than later. This will enable them to manage expectations about exactly what will be coming on to the balance sheet in 2019.’
IFRS 16 was issued on 13 January 2016 and is effective 1 January 2019.
Read our extensive CCH Daily IFRS 16 Leases analysis and insight from accounting and tax experts.
IASB IFRS 16 tools and resources
Information and tools to support the implementation of IFRS 16 from IASB is available here.