IFRS 16 “Leases” represents the first major overhaul of lease accounting for over 30 years. The IASB has long believed that IAS 17’s split between operating and finance leases is flawed, and has resulted in too much structuring and off-balance sheet financing. The IASB’s solution has remained the same throughout the project: to do away with the operating versus finance lease distinction and account for all leases ‘on-balance sheet’.
While many agree that reforms to lease accounting are long overdue, bringing all leases on-balance sheet is controversial. The IASB hopes to reduce controversy through various compromises – in particular by exempting short-term and low value asset leases. As a result businesses that lease only assets such as printers and laptops will face only a limited impact. For businesses that lease ‘big-ticket’ assets, such as property and high value equipment, this will however be a major change.
Whatever your views on the new Standard, this special edition newsletter highlights the changes that have been made, and matter to consider when evaluating the impact of this replacement standard.