The International Accounting Standards Board (IASB) is in the process of finalizing a new International Financial Reporting Standard (IFRS) that will require companies to bring leases onto the balance sheet. On March 16, 2015, it published a document outlining the likely practical effects of the new Leases Standard, as well as details on the similarities and differences between the IASB’s requirements and those of the US Financial Accounting Standards Board (FASB).
Deliberations by the IASB on the new accounting model for leases will be completed this month and the final Standard is scheduled to be issued later this year. Responding to calls from stakeholders for further information on the possible effects of the new Standard, the IASB staff have developed a document comparing the new and current accounting requirements.
The IASB and the FASB have been working jointly on the Leases project and have reached the same decisions in many areas, including requiring leases to be shown on the balance sheet, how to define a lease and how lease liabilities should be measured. However, there are some differences between the two Boards’ models and the document provides an overview of the likely practical effects of these differences.
Hans Hoogervorst, Chairman of the IASB, commented:
“Our stakeholders have asked for more details on how the new Leases Standard will change things in practice. The most important difference is that the new Standard will provide a richer set of information for investors than is available today, which, in turn, will aid their decision making. The main change that will be brought about by the new Leases Standard is an increase in assets and liabilities on the balance sheet for those companies that currently have a large amount of leases off balance sheet, thus improving the transparency of a company’s leverage and asset base.”
In addition to changes to the balance sheet, the new Leases Standard is likely to result in some important differences on the income statement. Among them is the reporting of higher operating profit compared to the current requirements – and in comparison to the FASB’s model. There will be no changes to total cash flows but, in the cash flow statement, the amount of operating cash will increase while the amount of financing cash will decrease.
The IASB's analysis concludes that the costs to companies of applying the new Standard will be broadly similar for both the IASB's and the FASB's model.
The document also looks at other potential implications of the leases accounting model, such as the possible impact on the cost of borrowing. It clarifies that the new Standard will provide more transparent information about a company’s financial commitments, but does not change those commitments. Therefore, should the Standard affect the cost of borrowing for a company, this will be because the improved reporting provides lenders with new information that is relevant and important to their decision making.
The effects of the new Leases Standard will also be discussed at the next Accounting Standards Advisory Forum meeting at the end of March.
Access the full Project update: Practical Implications of the New Leases Standard