The IASB agrees on an effective date for the new Leases Standard

The IASB agrees on an effective date for the new Leases

The International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) have been working towards a converged standard for accounting for leases that would bring most leases on-balance sheet.

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The International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) have been working towards a converged standard for accounting for leases that would bring most leases on-balance sheet. This joint project was intended to replace the current lease accounting requirements under IFRS and U.S. GAAP. Accordingly, the IASB and the FASB issued a revised Exposure Draft (ED) on leases in May 2013 which proposed changes towards both lessee and lessor accounting. The boards received extensive feedback on their proposals, and have heard a broad range of views. Since March 2014, they have redeliberated on almost all aspects of the project.  
In their March 2015 meeting, the IASB and the FASB decided to prepare non-converged ballot drafts of their new standards on lease accounting i.e. to proceed with different lease accounting models. 

New developments
The IASB expects to issue the new Leases Standard (IFRS 16) in December 2015.
In its final meeting in October 2015, the IASB agreed on the effective date of the proposed standard. IFRS 16, would be effective for accounting periods beginning on or after 1 January 2019. An early adoption would be permitted, provided the company has adopted IFRS 15, Revenue from Contracts with Customers.
The FASB will discuss the effective date of its version of the standard in November 2015.
While deciding the effective date, the IASB took into consideration the comments of the respondents to the ED which stated that a significant period of time would be required between publication of the new standard and its effective date, due to the costs and complexities involved in the application of the proposals of the ED.
Additionally, the IASB also addressed five issues identified during the drafting process, namely: 

  • Accounting for leasemodifications: A lessee (and a lessor holding a finance lease) would account for a lease modification that extends the use of an underlying asset (lease term) as the continuation of the existing lease. Such a lease modification should not be accounted for as a separate new lease. 
    • A lessee (and a lessor holding a finance lease) would treat a lease modification as a separate new lease only if:
      •  the modification increases the scope of the lease by adding the right to use one or more underlying assets, and 
      • the increase in consideration is commensurate with the increase in scope.


  • Reassessment of the discount rate for floating interest rate leases: For a floating interest rate lease, a lessee would update the discount rate whenever the lease payments are updated because of a change in the interest rate used to determine those payments.

  • Costs associated with returning an underlying asset at the end of a lease: A lessee would account for restoration obligations associated with a lease in accordance with IAS 37, Provisions, Contingent Liabilities and Contingent Assets. A lessee would include an initial estimate of costs to be incurred in the measurement of the right-of-use asset, and would account for any changes in the obligation as an adjustment to the carrying amount of the right-of-use asset in accordance with IFRIC 1, Changes in Existing Decommissioning, Restoration and Similar Liabilities.

  • The treatment of short-term leases and leases of low-value assets in a business combination: IFRS 3, Business Combinations should not require an acquirer to recognise assets or liabilities for short-term leases and leases of low-value assets in which the acquiree is the lessee.

  • Required disclosures for leases that are part of a disposal group that is held for sale or discontinued operation: A lessee would not provide any disclosures for leases within the scope of IFRS 5, Non-current Assets Held for Sale and Discontinued Operations beyond those required by that standard.

Our comments
The announcement reflects IASB’s recognition of the potential implementation challenges that are likely to be faced by preparers as they transition to this new standard, which is expected to bring in a fundamental shift in the way leases are accounted.  If IASB meets its target to publish the Leases Standard by the end of 2015, then companies are expected to have three years’ time to prepare for its implementation.

In India, companies are transitioning to Indian Accounting Standard (Ind AS) 17, Leases which is based on the corresponding IFRS standard, IAS 17, Leases.  While they transition to the new Ind AS reporting framework, Indian companies should also start assessing the impact of the proposed standard on leases on both their current leasing arrangements as well as the ones that would be entered into in future.
To access KPMG’s detailed newsletter on Leases, click here.

© 2016 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

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