Implications of the new leasing standard for the real estate sector

How will IFRS 16 Leases affect property occupiers?

The International Accounting Standards Board (IASB) has published IFRS 16 Leases. This articles explains how this new standard will affect property occupiers.

What is IFRS 16 Leases?

IFRS 16 sets out a comprehensive model for the identification of lease arrangements and their treatment in the financial statements of both lessees and lessors. One of the most notable aspects of IFRS 16 is that the lessee and lessor accounting models are asymmetrical.

For lessees, IFRS 16 introduces a single accounting treatment, recognition of a right-of-use asset and a lease liability.

For lessors the current finance and operating lease distinction and accounting remains largely unchanged.

IFRS 16 will replace IAS 17 for reporting periods beginning on or after 1 January 2019.

IFRS industry insights

The enclosed publication highlights issues from the new leasing standard that will be of interest to property occupiers.

  • Most property leases will come on-balance sheet for lessees, prompting recognition of a right-of-use asset and a liability for the lease component, but not the maintenance or other service component of payments.
  • Straight line operating lease expenses will be replaced with depreciation and front-loaded interest.
  • There is no requirement to estimate variable payments. Those varying with an index or rate are initially measured at the rate on the date of commencement, and are subsequently remeasured.
  • For sale and leaseback transactions, only the gain on the portion of asset not leased back is recognized immediately.
  • Capturing all the necessary data for implementation could be a sizeable task. Two particular practical challenges will be determining appropriate discount rates and remeasuring the asset and liability when payments change.

Change in overall expense profile upon adoption of IFRS 16 for an individual lease

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