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13 January 2017

IASB: Leases one year on—putting IFRS 16 into practice

IASB Members discuss messages they have heard from stakeholders about IFRS 16 implementation over the last year and give advice to companies implementing the new Standard.

When the IASB issued IFRS 16 Leases in January 2016, it set an effective date of 1 January 20191, giving companies three years to implement the new Standard. We are now a third of the way into that implementation period—how are companies getting on?

The transition requirements in IFRS 16 provide a number of different options for companies applying IFRS 16 for the first time.

There are potentially very significant cost savings available depending on which options are chosen. For example, a company can choose not to restate comparative information in the year that it first applies IFRS 16 and not to apply IFRS 16 to leases with a term ending within 12 months of the date of initial application.

There are also practical expedients available relating to the measurement of lease liabilities and right-of-use assets that companies will report on their balance sheets for the first time when IFRS 16 is applied.

However, taking the least costly options will lead to approximations in a company’s financial statements. These approximations will affect reported amounts in the year of transition and possibly for several years thereafter.

For example, one of the practical expedients in IFRS 16 enables a lessee to measure right-of-use assets on the date of initial application without using any historical data. However, if this practical expedient is used, companies will measure right-of-use assets at a higher amount than they would using historical data.

Consequently, depreciation charges in the income statement will be higher for the remainder of the lease term. For long-term leases of large assets such as property, companies may prefer to incur extra costs gathering historical data on transition to avoid a higher depreciation charge in the income statement. Conversely, for leases that are less significant to the financial statements, a company may prefer to take some shortcuts on transition. For this reason, many of the transition options in IFRS 16 are available on a lease-by-lease basis.

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