What is the new lease accounting standard?
What’s changed under IFRS 16?
IFRS 16 / Ind AS 116 is the most significant change to lease accounting in the last several years. IFRS 16 is introduced with effect from 1 January 2019, while Ind AS 116 is applicable from 1st April 2019. This new standard will affect most companies reporting and will have a significant impact on the financial statements of lessees of property and high-value equipment.
The new standard takes a totally new approach for accounting for leases. The new model is known as the ‘right-of-use’ model. So when a company has control over, or right to use, an asset that is rented, it should be classified as a lease for accounting purposes. At the same time it should also be recognised as an asset on the company’s balance sheet.
Significant financial liabilities held cannot be kept off-balance sheet, which was allowed for operating leases as per the previous standard. The objective is to ensure that companies report information about their leased assets uniformly bringing complete transparency on the lease assets and liabilities of the companies.
As per the new standard costs for maintenance, cleaning, etc should be separated from the main lease payments, if they are included in them, and accounted for separately.
Depreciation of the asset known as ‘right-of-use’ and interest on the lease liability have to be shown in the profit and loss account.
As per IFRS 16, if the entity has a number of lease agreements, those can be combined into a portfolio, instead of having to report those individually. This can only be done if there is no financial advantage for the entity in combining such leases.
Accounting by lessor is by and large unaffected by the introduction of IFRS 16.
