1. Introduction
From fiscal years starting after January 1, 2019, International Financial Reporting Standards (IFRS) requires to apply the new lease accounting standard (IFRS 16). There are not many Japanese companies adopting IFRS standards, but more in line with international standards, Accounting Standards Board of Japan (ASBJ) decided in March 2019 to start developing the new lease accounting standard in which all leased assets and liabilities are recognized on the balance sheet. In this News, we will mention the summary of the new lease accounting standard IFRS 16, focusing on the lessee’s transactions.
2. IFRS 16 new lease accounting standard
The objectives of IFRS 16 are (a) to reflect lease transactions faithfully, and (b) to provide financial statements users with the basic information for evaluating the amount, timing, and uncertainties of cash flow deriving from lease transactions. In order to achieve such objectives, the lessee needs to recognize assets and liabilities from lease transactions.
① Definition of lease
For identifying lease transactions based on the economic substance, there exists more detailed definitions.
② Principle accounting treatments
In principle, all assets and liabilities for lease transactions with the term exceeding 12 months have to be recognized (“a single accounting model”). The lessee needs to include an asset representing its right to use the leased (underling) asset and a liability indicating the obligation of paying lease fees on the balance sheet. In the new rule, the accounting terms of the “right of use asset” and “lease liability” are used.
③ Exceptional accounting treatments
The short-term lease (a lease term of 12 months or less) or the small amount of lease (a value of 5,000 dollars or less) is accounted for in the same method as ordinary rental transactions.
3. Effects of new lease accounting standard
As mentioned above, the biggest impact from the new lease accounting standard is to increase the scope of lease transactions included on the balance sheet. Due to the increase in total assets and liabilities, the introduction of the new accounting standard will influence some key financial metrics. Companies with various lease transactions should keep in mind of the impact caused by the new rule.
4. Conclusion
In this News, we mentioned the new lease accounting standard IFRS 16. Japan is currently under consideration of introducing the new standard, but how about finding embedded lease transactions which match the new lease accounting standard for the future operation?
References
・Takashi Hashimoto, Yoshitaka Yamada “IFRS Accounting Basic Textbook (6th edition)” Chuo-Keizai Sha
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