Changes to lease accounting under the new IFRS 16 Leases will create more balance sheet transparency in the automotive sector, but there will be significant upheaval in terms of reporting practice, say Armaghan Haq, head of accounting policy, retail, Lloyds Banking Group and Paul Lippitt, principal consultant, fleet, Lex Autolease
In January 2016, the International Accounting Standards Board (IASB) issued IFRS 16 Leases, superseding IAS 17 Leases. This will affect a wide variety of sectors, from businesses and organisations which lease car or van fleets to airlines that lease aircraft and retailers that lease stores. The new standard will be mandatory for annual periods beginning on or after 1 January 2019.
There are two recognition and measurement exemptions for lessees under the standard, which are both optional:
- short-term leases: these leases are defined as leases with a lease term of 12 months or less which do not contain a purchase option. The lease term includes periods covered by an option to extend or an option to terminate if the lessee is reasonably certain to exercise the extension option or not exercise the termination option. The election needs to be based by class of underlying asset.
- low value leases: low value is explained in IFRS 16’s basis for conclusions as assets of a value of US$5,000 (£3,333) or less when new. It is important to note that the exemption remains available even if the aggregated value of the assets captured by the exemption may be material. The election needs to be made on a lease-by-lease basis.
Changes to lessee accounting for operating leases
While there is little change in lessor accounting, IFRS 16 will fundamentally alter the way lessees account for operating leases.
