IFRS Update 2 trillion of new balance sheet assets and liabilities

by Heather Dandridge  29-Feb-2016 at 12:04

IFRS Update: £2trillion of new balance sheet assets and liabilities by Alan Nelson

The new IFRS 16 looks set to have a major impact. So what it is all about?

IFRS 16 is all about leases. It specifies how to recognise, measure, present and disclose leases. The new standard was issued earlier this year and applies to annual reporting periods from 1 January 2019.

Bringing leases onto the balance sheet

Under IFRS 16, companies will be required to bring most leases on-balance sheet from 2019. This is intended to bring greater transparency to the balance sheet and enable investors to compare one company with another. For the first time analysts will be able to see a company's own assessment of its lease liabilities. These will be calculated using a standardised methodology that all companies reporting under IFRS16 will be required to follow.

Why is this important?

The impact of this is not inconsiderable. A large part of the estimated $2.8trn (£2trn) worth of lease commitments that are currently off balance sheet will be included in the balance sheets of the world's listed companies as assets and liabilities.

Does it apply to all leases?

IFRS 16: Leases applies to all leases, including subleases except for:
  • Leases to explore for or use minerals, oil, natural gas an similar non-regenerative resources
  • Leases of biological assets held by a lease
  • Service concession arrangements
  • Licences of intellectual property granted by a lessor
  • Rights held by a lessee under licencing agreements for items such as films, videos, plays, manuscripts, patents and copyrights within the scope of IAS 38: Intangible Assets
So why has it taken so long for the IASB to release IFRS 16?

The new standard will affect 50% of the world's listed companies, and in some sectors, such as the airline industry the IASB believes that off balance sheet leases amount to more than 100% of the value of the airline's total assets. So will such a major change, the IASB has gone through an extensive due diligence process. Since 2009, it has published three public consultations and held hundreds of meetings.

Will the new standard be costly to implement?

There are concerns about the cost of implementation but the IASB has argued strongly that the benefits of the new standard for investors and analysts far outweigh the costs.

Not everyone agrees of course, and there is no doubt that the impact of IFRS 16 should not be underestimated. There will be a lot of work to do to implement the changes and the implications go way beyond a mere change in accounting.
 
 
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