“US$ 3.3 trillion of lease commitments.
Over 85% do not appear on the balance sheet”
(Based on a sample of 30,000 listed companies using IFRS or US GAAP)
Did you know that IFRS 16 Leases effective for periods beginning on or after 1 January 2019 changes this?
It introduces a much-awaited change in the accounting for operating leases by lessee. It brings most leases on the balance sheet with an asset and a corresponding liability.
“These new accounting requirements bring lease accounting into the 21st century, ending the guesswork involved when calculating a company’s often-substantial lease obligations.
The new Standard will provide much-needed transparency on companies’ lease assets and liabilities, meaning that off balance sheet lease financing is no longer lurking in the shadows. It will also improve comparability between companies that lease and those that borrow to buy.”
Hans Hoogervorst, Chairman
IFRS 16 requires that for most leases (optional exemptions available for short term lease and low value asset lease), there is a Right-of-use asset (subject to amortisation) and Lease liability (subject to interest charge with lease payments reducing the liability) recognised by the lessee. There is no distinction between operating and finance leases.
The application of IFRS 16 ensures that the leverage is correctly stated on the balance sheet. It improves the comparability of financial statements of entities that borrow money to buy an asset and those that lease assets.