IASB lease accounting standard

On January 13, 2016, the International Accounting Standards Board (IASB) issued International Financial Reporting Standard (IFRS) 16, Leases. The IASB has been working in conjunction with the Financial Accounting Standards Board (FASB) to develop new lease standards for over a decade. The new standard will affect around 50% of the world’s listed companies, especially those in the airline, retail, and travel/leisure sectors.

Despite the fact that leasing provides an important source of financing for many companies (over $3.3 trillion of lease commitments), the old lease accounting standards made it difficult for investors and other users to get an accurate picture of a company’s lease assets and liabilities since over 85% of those commitments are not captured on the balance sheet. IFRS 16 solves this problem by eliminating the classification of operating leases and requiring that all leases be reported on a company’s balance sheet as assets and liabilities. (Short-term leases that are less than 12 months and leases of low-value assets are exempt from the standard’s requirements.)

The FASB is expected to release its version of the new lease standard later this quarter. The two boards are aligned on the central issue of bringing leases onto balance sheets, and on the definition of a lease and how lease liabilities should be measured, although there are some differences between the FASB and IASB versions of the standard. For example, the GAAP standard will have a two-model approach for operating leases and financing leases, whereas the IFRS standard has a one-model approach (i.e., just a finance lease expense approach). The difference will be the method of expensing the amounts related to those two leases.

IFRS 16 becomes effective Jan. 1, 2019. FASB said its upcoming leasing standard will be effective for public companies for fiscal years and interim periods within those fiscal years beginning after Dec. 15, 2018. Accounting pronouncements are eligible to be tested on the CPA exam in the later of (1) the first testing window beginning after the pronouncement’s earliest mandatory effective date or (2) the first testing window beginning six (6) months after the pronouncement’s issuance date. In either case, there is a simultaneous introduction of content related to the new pronouncement and removal of content related to the previous pronouncement. Therefore, IFRS 16, Leases, will become testable October 2019.

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