IFRS: 16 Leases

A new standard in IFRS 16 entitled ’Leases’ will come into force in January 2019. This standard requires lessees to recognize assets and liabilities on their balance sheets for most leases. A lessee is expected to have a single accounting model for both operating and finance leases, with only his two exceptions for short-term leases and low-value assets such as personal computer leases (PWC 2). there is. Accounting for sale and leaseback arrangements is defined by the definition of sale under IFRS 15 (EY 16).

The old standard allowed lessees to include finance leases on their balance sheet, but operating leases were off-balance sheet (IFRS 3). Tenants must report both financing and operations. The lessee is now required to report both financing and operating leases on the balance sheet. The standard will require the lessee to make more disclosures regarding operating leases which were currently off-balance sheet.

One of the major impacts on the lessee will be the gross-up of the balance sheet. It will result in deterioration of some debt ratios and the return on asset compared to the current reporting as it will increase the debt levels. The organizations will hence need to explain the implications of this reporting to internal and external users of financial reports.

The change in the standard expects that organizations will have to change their policies, processes, controls and their IT support for leasing and procurement of leases as well as the tax administration on leases. Companies may also look into implications of the new standard on their financial statements and how they negotiate lease contracts.

Several problems are likely to arise with the use of the new standard. First, it gives a broad definition of a lease contract which may cause trouble for most accountants as they try to determine what constitutes a lease (Deloitte 6). Due to the difficulty of determining a lease, the accountants are going to use judgments which will lead to manipulation. Whenever a situation is open to judgment, it is likely for two accountants to arrive at two different numbers.

Works Cited

Deloitte. “Leases: A Guide to IFRS 16.” June 2016, Accessed Dec. 2017.

EY. “Leases: A summary of IFRS 16 and its effect.” ey.com, May 2016, Accessed Dec. 2017.

IFRS. “IFRS 16 Leases.” ifrs, Jan. 2016, Accessed Dec. 2017.

PWC. “The new lease standard IFRS 16 ”Leases”.“ www.pwc.com/id, Apr. 2016, Accessed Dec. 2017.