In this article, we look at how the introduction of the new lease accounting standard – IFRS 16 ‘leases’ will impact disclosures relating to 2019 interim accounts, as well as attempting to clarify some of the more salient requirements, issues and concerns.
Big Brother may not be watching you but the FRC (The Financial Reporting Council) have been watching many entities and will continue the monitoring of the way companies report the impact of the new leasing standards (IFRS 16 and ASC 842) by way of disclosures in their financial reporting of their 2019 interim accounts.
The IASB and FASB have set out the new standards relating to accounting for leases (assets and associated liabilities) and for accounting periods on or after January 1st 2019, all interim accounts will need to be prepared applying the same compliance criteria as the next set of full annual accounts. Quarterly and half yearly interims will reflect the new standards just as the annual reports must.
The disclosure requirements for the expected impact of new accounting standards are set out in Paragraphs 30 and 31 of IAS 8, ‘Accounting Policies, Changes in Accounting Estimates and Errors’. In particular, IAS 8 requires entities to disclose known or reasonably estimable information relevant to assessing the possible impact that application of IFRS 16 will have on an entity’s financial statements in the period of initial application.
All entities with leases, or arrangements where significant judgement has been made in assessing whether it contains a lease, will need to consider their disclosure of the expected impact of IFRS 16. Entities without leases should consider disclosing the fact that IFRS 16 is not expected to impact them.
There has been recent regulator focus on providing robust disclosure of the impact of IFRS 16 within 2018 annual reports.
Some research was conducted by the FRC around the disclosures in a sample of companies’ reports and accounts for the year 2018 - in particular disclosures relating to the new lease accounting standards. Unsurprisingly though perhaps disappointingly what showed up was that:
- There was a lack of meaningful information which probably indicates much work was still to be performed before full impact could be disclosed.
- Though disclosures did describe the potential and likely effect of compliance with the new leasing standards (whether IFRS 16 or ASC 842) too often there was little or no information on how transition was occurring or how it would occur.
- Whilst the disclosure might lay out the available exemptions and expedients no mention was made on which if any might be applied.
Back to 2019 and in the compiling of year-end financial reports for 2018, companies in their final accounts before adoption of IFRS 16 or ASC 842 will be expected to detail a quantitative disclosure of the hopefully modeled impact of compliance or at the least a qualitative assessment of the impact.
Such assessments whether qualitative or quantitative about the impact of compliance will need to be verified or expanded upon in subsequent interims during this first year of adoption of IFRS 16 and these of course must be prepared in accordance with the new requirements. Of particular importance – The FRC expects:
- quantitative disclosure to be accompanied by informative and detailed explanation of the changes, tailored to the company’s specific circumstances;
- clear explanations of the effect of transition, including comparison of previous accounting policies with new policies;
- appropriate commentary on comparative amounts, where transitional arrangements may mean these are not directly comparable with current period amounts;
- any key judgments made by management in applying IFRS 16 to be clearly explained, such as including clarification of the exemptions they intend applying and the policy choices that they have made; and
- an explanation of how the transition has been implemented, after careful consideration of the transitional disclosure requirements under IFRS 16 and those requirements of IAS 8 referred to previously - ‘Accounting Policies, Changes in Accounting Estimates and Errors’.
- disclosing the fact that IFRS 16: Leases has not yet been implemented, that it is applicable for annual reporting periods commencing 1 January 2019, and the date on which the entity expects to first apply IFRS 16.
- an update specifying the structure and status of the entity’s implementation project.
- an explanation of any accounting policy changes which will take effect with adoption of IFRS16, including whether exemptions will be applied (such as low-value or short-term exemptions).
- the transition approach, fully retrospective or simplified, which will be implemented, and which, if any, practical expedients will be applied.
- how have key judgements and estimates been made (such as assessing whether an arrangement contains a lease, determining the lease term, calculating the discount rate and whether any service/lease components of arrangements will be separated), and identifying lease portfolios for which IFRS 16 has a significant impact.
- preferably via impact modelling, a reliable estimate of the expected impact (restatement to assets, liabilities and retained earnings/opening retained earnings adjustment, or the change in assets, liabilities, income, expense on adoption, depending on transition approach).
- where alternative performance measures (APMs) are relied on by investors, lenders and other stakeholders in an entity (such as EBITDA), and IFRS 16 is expected to have a significant impact on these metrics then a qualified valuation of the impact.
- when utilising the simplified transition approach, a statement setting out any differences between the current operating lease commitment disclosure and IFRS 16 lease liability balances, and confirmation that lease liability comparative information has not been restated.
In Summary, IFRS 16 applies for annual reporting periods beginning on or after 1 January 2019. It therefore necessarily follows that there is an expectation, as discussed above, that disclosures within the 2018 annual reports will explain the expected impact of IFRS 16, particularly in the light of 2018 annual reports being published in 2019, after the new lease accounting standard has been adopted.
Disclaimer: this article contains general information about the new lease accounting standards only and should NOT be viewed in any way as professional advice or service. The Publisher will not be responsible for any losses or damages of any kind incurred by the reader whether directly or indirectly arising from the use of the information found within this article.