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In 2019, the IASB lease accounting standard, IFRS 16, began to go into effect for companies worldwide. However, there are still some companies that have yet to adopt the standard, as well as those who may be struggling with how to handle leasing processes post-adoption in order to maintain compliance with IFRS 16.
This handbook will provide an overview of the technical accounting of IFRS 16 as well as how companies can successfully achieve and maintain compliance with the standard.
The IFRS 16 standard requires that all leases be reported as finance leases unless the lease term is less than 12 months or the value of the lease is less than US$5000. The on-balance sheet requirement of the standard created an implementation challenge for many companies. The challenge of complying with IFRS 16 is exacerbated for companies with large equipment leasing portfolios because equipment leasing programs are typically decentralized, making it difficult to track down the data needed to comply with the standards.
IFRS 16 replaced IAS 17 starting on 1 January 2019. The major change from IAS 17 was that all leases are now treated as finance leases, with exceptions for short-term and low-value leases. In other words, all leases that were treated as operating leases in the past are now capitalized on the statement of financial position, and reported as an interest and depreciation expense on the statement of profit and loss. As a result of the change, it’s estimated that operating leases totaling more than 2 trillion USD have moved onto corporate balance sheets.