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New IFRS Accounting Standard On Leases Effective

Monday, January 21, 2019

International Financial Reporting Standard 16 "Leases," issued in January 2016, is effective for annual reporting periods starting on or after January 1, 2019. It replaces IAS 17 Leases and related interpretations.

IFRS 16 makes substantial changes to the accounting standards for leases, including eliminating a lessee's classification of leases as either operating leases or finance leases. Instead, almost all leases are "capitalized" by recognizing a lease liability and right-of-use asset on the balance sheet. The Standard includes few changes for lessors.

Leasing is a common form of finance. The Effects Analysis, published alongside IFRS 16 in 2016, described its likely costs and benefits. This analysis estimated that listed companies around the world have around USD3 trillion worth of future payments for leases, which were not recognized on the balance sheet applying the previous accounting requirements.

According to the IFRS Foundation, IFRS 16 will increase visibility of companies' lease commitments to better reflect economic reality. The Standard will also make it easier for users of financial statements to compare companies that lease their assets with companies that borrow money to buy their assets, creating a more level playing field.