The New Lease Accounting Standard for International Financial Reporting
What is IFRS 16?
IFRS 16 is a new lease accounting standard published by the International Accounting Standards Board (IASB) in January 2016. This new standard changes the way that companies account for leases in their financial disclosures, especially their balance sheets and profit and loss statements. IFRS 16 replaces an earlier international lease accounting standard – IAS 17. IFRS 16 will be effective for reporting periods beginning on or after 1 January 2019 for entities reporting under international financial reporting standards.
Impacts to Financial Statements
Impact to the Balance Sheet
With IFRS 16, almost all leases will be reported on corporate balance sheets. A new right-of-use (ROU) asset will be presented separately on the balance sheet, as will a separate lease liability. Under the current standard, IAS 17, only certain lease arrangements – called finance leases – were listed on the statement of financial position while operating leases were only reported in the footnotes. Under IFRS 16, all leases will now be considered finance leases unless they meet certain exceptions and will be reported on the statement of financial position. Key financial metrics such as Return on Assets will be influenced through the addition of these new assets and liabilities to the balance sheet.
Impact to the Income Statement
Companies must report a depreciation charge for leased assets within the operating costs section of the profit and loss statement. An interest expense must be reported for lease liabilities within the finance costs section of the profit and loss statement. Under the current standard, IAS 17, companies reported a straight-line lease expense that was typically the same in each period of the lease. With IFRS 16, the expenses for leases will be front-loaded as the amount of interest is reduced over the term of the contract.