Revised accounting guidelines for lease agreements
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The Financial Accounting Standards Board (FASB) has introduced a new lease standard, IFRS 16, which is set to revolutionize the way businesses account for leases. The new standard addresses a shortcoming in current accounting processes, where entities use assets to generate income without recording related assets or liabilities on their balance sheets.
One of the key challenges in implementing the new standard is separating lease and non-lease components in a contract, as well as applying the new standard to sale and leaseback transactions. Additionally, accounting for leveraged leases, although eliminated under the new standard, will be grandfathered, adding to the complexity.
The new standard requires extensive footnote disclosure to provide investors with meaningful information about lease-related cash flows and judgments. This could lead to complex and potentially expensive decisions, especially when it comes to determining whether an agreement is, or includes, a leased asset. Identifying a lease can be particularly difficult in cases where services are purchased and include the use of equipment, or in cloud computing service agreements.
The broadened definition of a leased asset under the new standard means that the right of use, not the underlying asset itself, is recorded as a leased asset. This could result in companies' operating lease assets and liabilities (previously unrecorded) being substantial for many entities.
Debt lenders may be willing to re-negotiate debt covenants in response to the new lease standard. If not, entities may need to change how they operate or negotiate new leases to avoid violating covenants that restrict the amount of debt they can have.
A valuable resource for learning about the new lease standard and related implementation issues is PwC's Leases 2016 guide, which runs around 300 pages.
Several large companies, including Volkswagen, Siemens, and Deutsche Telekom, have reported significant amounts of unregistered leasing liabilities and assets under the new leasing standard IFRS 16. The complexity of the new standard generates numerous, intriguing potential articles.
The new lease standard requires lessees to record assets and liabilities from operating lease contracts on their balance sheets. Assessing whether a lessee controls the use of an asset can be complex, requiring judgement and cooperation with other entities.
The new lease standard is a significant change for businesses and presents both challenges and opportunities. By understanding the new standard, businesses can make informed decisions and navigate the changes effectively.
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