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New leases standard - Introducing IFRS 16

New leases standard

Insight and analysis on the impact of IFRS 16 Leases.

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New leases standard - Introducing IFRS 16

The new leases standard – IFRS 16 – will require companies to bring most leases on-balance sheet from 2019.

Under the new standard, companies will recognize new assets and liabilities, bringing added transparency to the balance sheet. At present, many analysts adjust financial statements to reflect lease transactions that companies hold off-balance sheet.

For the first time, analysts will be able to see a company’s own assessment of its lease liabilities, calculated using a prescribed methodology that all companies reporting under IFRS will be required to follow.

Our SlideShare presentation can help you to understand the proposals and the possible impacts for your business. If you’re unable to view the presentation online, you can download a PDF version [PDF 191 KB].

All companies that lease major assets will see an increase in reported assets and liabilities. This will affect a wide variety of sectors, from airlines that lease aircraft to retailers that lease stores. The larger the lease portfolio, the greater the impact on key reporting metrics.”

Kimber Bascom, KPMG’s global IFRS leasing standards leader

What’s new in IFRS 16?

At the simplest level, the accounting treatment of leases by lessees will change fundamentally. IFRS 16 eliminates the current dual accounting model for lessees, which distinguishes between on-balance sheet finance leases and off-balance sheet operating leases. Instead, there is a single, on-balance sheet accounting model that is similar to current finance lease accounting.

Lessor accounting remains similar to current practice – i.e., lessors continue to classify leases as finance and operating leases.

The impacts

For lessees, the lease becomes an on-balance sheet liability that attracts interest, together with a new asset on the other side of the balance sheet. In other words, lessees will appear to become more asset-rich but also more heavily indebted.

The impacts are not limited to the balance sheet. There are also changes in accounting over the life of the lease. In particular, companies will now recognize a front-loaded pattern of expense for most leases, even when they pay constant annual rentals.

All companies will need to assess the extent of the standard’s impacts so that they can address the wider business implications – and can expect analysts to take a close interest. Areas of focus may include:

  • the effect of the standard on financial results;
  • the costs of implementation; and
  • any proposed changes to business practices.

Effective date

The new standard takes effect in January 2019. Before then, companies will need to analyze their leases, and make new estimates and calculations that will need to be updated periodically. If you haven’t done so already, you need to start looking at your contracts now.

“For some companies, a key challenge will be gathering the required data. For others, more judgemental issues will dominate – for example, identifying which transactions contain leases.”

Brian O’Donovan, KPMG’s global IFRS leasing standards deputy leader

Resources

Read our First Impressions: IFRS 16 Leases [PDF 678 KB]. This publication provides an overview of the new standard and how it will affect financial statements. It includes examples and insights to help you assess the potential impact on your business and to assess your readiness for 2019.

Our Leases – Transition options [PDF 602 KB] publication provides an overview of the options and expedients, together with KPMG’s insight and a comprehensive worked example modelling how the various options would affect a fictional company.

Read Leases: A Step Closer to Understanding [PDF 5.99 MB]. This Issues In-Depth publication provides an overview of the requirements of FASB ASC Topic 842, Leases. For more information on the new U.S. standard, visit Latest on Leases

Our publication, Leases: Upstream oil and gas [PDF 323 KB] can help you assess the potential impact of the new standard on your business. It explains the key requirements, highlights areas that may result in a change in practice, and features KPMG insights.

Our publication, Insights into Mining: Issue 7 [PDF 91 KB] takes an early look at the new lease standard for companies in the mining sector.

Our publication, Banking Bulletin: IFRS 16 takes an early look at the new lease standard for banks.

Listen to our overview webcast on the new leases standard which originally aired on March 9, 2016. Please click here to access the webcast replay and to download a copy of the presentation [PDF 637 KB].

Listen to our webcast on the new definition of a lease which originally aired on May 12, 2016. Please click here to access the webcast replay and to download a copy of the presentation [PDF 771 KB].

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