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Leading to increased investor and stakeholders assurance
The new lease accounting standard[1] published recently by the International Accounting Standards Board (IASB) brings added transparency to financial reporting, according to KPMG International.
The new standard requires companies to bring most leases on-balance sheet, recognizing new assets and liabilities. At present, many analysts adjust financial statements to reflect lease transactions that companies hold off-balance sheet.
Commenting on the new standard, Mr. Mahesh Balasubramanian, IFRS Partner in KPMG in Bahrain, said: "All companies that lease major assets for use in their business will see an increase in reported assets and liabilities. This will affect a wide variety of sectors, from airlines that lease aircraft to retailers that lease stores. The larger the lease portfolio, the greater the impact on key reporting metrics."
Companies are currently required to disclose details of their off-balance sheet leases and analysts use this information to adjust published financial statements. Mr. Balasubramanian continued: "current lease accounting requires financial statement users to adjust for off-balance-sheet leases. The key change will be the increase in transparency and comparability. For the first time, analysts will be able to see a company's own assessment of its lease liabilities, calculated using a prescribed methodology that all companies reporting under IFRS will be required to follow."
The new standard will come in to effect in January 2019. The accounting changes do not affect cash flows directly. However, given the scale of the accounting change, KPMG expects that companies will be keen to understand the size of the lease liabilities arising from transactions they enter into between now and 2019.
Although the new requirements are less complex and less costly to apply than the IASB's earlier proposals, some key impacts cannot yet be quantified until the new standard is rolled out, Mr. Balasubramanian added.
Note to mention that the US Financial Accounting Standards Board (the FASB) will publish a new US GAAP standard on lease accounting shortly. Although the IASB and FASB worked together on lease accounting for years, their final standards feature different lessee accounting models.
Mr. Balasubramanian concluded: "the outcome of this long-running convergence project will be divergence in accounting for common lease types. The new IFRS and US GAAP standards will introduce differences in the profile and presentation of annual lease expense where none currently exist, reducing comparability between the two major accounting frameworks."
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[1] IFRS 16 Leases
For further information, contact:
Afrah Faraj
Marketing Manager, Markets
T: +973 17201495
F: +973 1722 7443
afaraj@kpmg.com
© Press Release 2016
