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IFRS 16 Leases: A Step Towards a More Transparent Balance Sheet

A Step Towards a More Transparent Balance Sheet

The new Standard is the by-product of a joint project of the IASB with the Financial Accounting Standards Board (FASB) of the United States of America, in response to concerns about the lack of transparency of information about lease obligations - notably those arising from operating leases

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IFRS

On 13 January 2016, the International Accounting Standards Board (IASB) issued a new standard - IFRS 16 Leases (the “new Standard”), thereby realizing its long-standing goal of ensuring that entities that engage in lease transactions present more transparent balance sheets by providing relevant information in a manner that faithfully represents the transactions. IFRS 16 Leases sets out the principles for the recognition, measurement, presentation and disclosure of leases and replaces the following standards and interpretations:

- IAS 17 Leases
- IFRIC 4 Determining whether an Arrangement contains a Lease
- SIC-15 Operating Leases - Incentives
- SIC-27 Evaluating the Substance of Transactions involving the Legal
  form of a lease

The new Standard is the by-product of a joint project of the IASB with the Financial Accounting Standards Board (FASB) of the United States of America, in response to concerns about the lack of transparency of information about lease obligations - notably those arising from operating leases. Consequently, companies engaged in leasing assets are required under the new Standard to recognise assets and liabilities arising from both operating and finance leases. Investors and analysts would therefore, be able to make direct comparison between companies that borrow to buy assets and companies that use assets under operating lease arrangements.

The Standard applies to leases of all assets, except for: leases of non-regenerative resources, leases of biological assets, service concession arrangements, licences of intellectual property granted by lessor, and rights held by a lessee under certain licensing agreements.

The new Standard will be effective for annual periods beginning on or after 1 January 2019. Early application is permitted, provided the new revenue standard, IFRS 15 Revenue from Contracts with Customers has been applied, or is applied at the same date as IFRS 16.
 

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