IASB sets out practical effects of bringing leases onto the balance sheet

IASB is in the process of finalising a new IFRS that will require companies to bring leases onto the balance sheet. It has 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.

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.

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