Full convergence on leases Almost, but not quite
The publication by the International Accounting Standards Board (IASB) of International Financial Reporting Standard (IFRS) 16 'Leases' represented a major achievement for the IASB.
Reflecting the spirit of the words of The Hollies, “The Road had definitely been long with many a winding turn” but fortunately the “Who know where who knows when” was overcome and a destination was finally reached.
IFRS 16 was a standard done in collaboration with the Financial Accounting Standards Board (FASB). FASB published its standard (Leases-Topic 842) also in January. Whilst full convergence was not quite achieved (see below) the project has been an undoubted success with both bodies achieving the ultimate aim of requiring far more off balance sheet items to be included on an entity’s balance sheet.
Indeed, it has been estimated that currently listed companies applying either IFRS or US GAAP disclose in the region of US$3 trillion of off balance sheet lease commitments. How much of that figure moves on balance sheet in the form of a right of use asset and corresponding liability remains to be seen but it will undoubtedly be a significant amount.
As noted above, compete convergence was not quite achieved. The difference relates to the respective treatments in the income statement.
Under IFRS, the charge to the income statement will be split into two separate components – firstly the depreciation charge on the lease asset (included within operating costs) and secondly the interest charge on the lease liability (included within finance costs).
In contrast, under FASB’s model the expenses related to those leases are reported typically on a straight-line basis and are included within operating costs. Also, under IFRS, although the depreciation charge is typically even, the interest expense reduces over the life of the lease as lease payments are made. Therefore, the IFRS model results in a reducing total expense as an individual lease matures.
IFRS 16 has an applicable date of accounting periods commencing on or after 1 January 2019 whilst the FASB standard, for public business entities, has an applicable date of accounting periods commencing after 15 December 2018.