It’s been a long time in the making and no one in the industry is too surprised, but come 2019 you will now need to bring all business lease commitments onto your balance sheet.
Due to an updated standard issued by the International Accounting Standards Board (IFRS 16 Leases), the current concept of operating leases will be abolished and all leases will be treated as finance leases as they will be recognised as liabilities on business balance sheets.
The expense will now be recognised as depreciation on the leased asset, rather than as a leasing cost, and an interest charge on the lease liability. It will be calculated using the effective interest method, which will result in the gradual reduction of interest cost over the life of the lease.
The changes will take effect as of 1 January 2019 and will affect listed firms, management investments, larger private companies and those SMEs that choose to prepare and file accounts. Those in retail, distribution, agribusiness and logistics are expected to be most affected and should be aware of the potential consequences.
Exceptions to this new standard include short-term leases (less than one year) and low-value assets such as office equipment and computers.
It is hoped that these changes will give greater insight into the true liabilities of organisations on their balance sheet and what their long term financial commitments actually are. In doing so, it will provide greater transparency for financial factors affecting each business for both investors and financiers alike.