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.