SKP Assurance Alert
International Financial Reporting Standard 16

The former guideline on lease accounting, International Accounting Standard (IAS) 17, was issued more than 30 years ago by the International Accounting Standard Board (IASB). Considering the changes in the economic environment and increased preference of business houses getting into leasing arrangements, the old accounting guidelines warranted a revisit to appropriately reflect the dynamic arrangements in financial statements. Globally, this guideline has been subject to criticism and the need 
to revise it has been a genuine accounting requirement.

The IASB and the Financial Accounting Standards Board (FASB) initiated a joint project for revising lease accounting. Both boards reached similar conclusions in many aspects including a requirement to recognise the related underlying assets and liabilities for all types of leases. However, their views on lease expense and the reporting of lease related cash flows, in respect of the operating lease arrangements, differed. The FASB adopted the dual model of accounting for operating lease and finance lease (capital lease).
The IASB finally issued the long-awaited International Financial Reporting Standard (IFRS) 16 on 13 January 2016 which will override IAS 17 in due course.  

Key highlights
  • The effective date of applicability is 1 January 2019.
  • Earlier adoption of the standard is permitted for entities that apply IFRS 15 - Revenue from Contracts with Customers, at or before the date of initial application of IFRS 16.
  • A single model of accounting has been prescribed for lessees for leases with a duration greater than 12 months.
  • ‘Right-of-use’ shall be recognised as an asset in the books of the lessee and depreciation shall be charged on the same. For a lease term less than or equal to 12 months, entities may elect to directly expense out the lease payments.
  • 'Right-of-use' asset is to be initially measured at the present value of minimum lease payments and also includes payments to be made in the optional period.
  • Accounting of lessor is substantially similar to what it was in IAS 17. Accordingly, classification of operating/finance lease shall continue to prevail in lessor’s books.
 
SKP’s comments
We see the issuance of IFRS 16 as a welcome step for lease accounting. The FASB equivalent of lease accounting is now an awaited guideline. The impact of this new standard on Indian Accounting Standards (
Ind AS) still needs to be seen. Certain questions have arisen such as whether the Ministry of Corporate Affairs (MCA) will issue a new Ind AS based on IFRS 16, and if they do, whether its adoption would be mandatory or whether a future date for adopting the new standard will be notified for companies currently following Ind AS based reporting. These questions will be answered in the days to come.

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