Lease accounting - proposed changes

The issues surrounding operating leases and their capitalisation on the balance sheet has been the subject of intense debate over the last decade - further intensified by the misrepresentation of assets and liabilities through revaluations or non-standardised reporting; the catalyst for the Global Financial Crisis.

The  IASB August 2014 Project Update contains a study that reveals that long term balance sheet liabilities are understated by as much as 46% in certain parts of the world due to the fact that operating leases are not recognised.

The exclusion of lease assets and liabilities from the balance sheet leads to an incomplete picture of the financial position of the company and also makes it hard to properly compare companies from the same industry with different levels of leasing.

After the initial proposal in 2010 was highly commented upon and opposed, in 2013 the IFRS issued an exposure draft that divided leases into Type A ( similar to financial leases where underlying asset is not property) and Type B  (certain property leases).

The final proposal for the Standard is expected to be released in 2015 and will include the below changes:

  • Leased assets and liabilities should be capitalised on the balance sheet (exceptions for small items such as laptops and furniture)
  • Leases of 12 months or less will not need to be recognised on balance sheet
  • There will be a single lease model with front-end loaded expenses for all leases (no Type A or Type B)
  • No changes to lessor accounting.

Businesses that use leases as part of their operations should review their Financial Statements to see if changes to accounting methods need to be made in the current financial year.  Contact BBA Accountants for a review of your Balance Sheet if you are concerned this may apply to you.