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New lease accounting rule brings $3trn onto company balance sheets

19 January 2016

Companies in more than 100 countries will be forced to bring around $3 trillion of lease commitments onto their balance sheets in a major overhaul of international accounting rules governing how companies should report their leasing obligations.

Accounting standard setter the IASB today published IFRS 16 Leases, which requires companies to bring most leases on-balance sheet for the first time, recognising new assets and liabilities.

The new rules are intended to provide investors with more transparent and reliable information about a company's leasing commitments, without having to make difficult estimates about a company's true level of debt.

Entities that have significant operating leases, such as lessees of real estate, large equipment and machinery, and transportation vehicles, will be most affected by the standard, which is effective 1 January 2019.

It will particularly affect businesses with a significant number of material off-balance sheet leases, including those in the transportation and real estate sectors. Retailers and other companies with significant leased premises should also prepare for major changes. The potential implications also go way beyond a mere change in accounting.

Short-term leases of less than 12 months and leases of low-value assets, such as personal computers, are exempt from the requirements.

US counterpart FASB is set to announce its own standard on leases in the coming weeks, while the EU will need to formally endorse the standard before it can be used by European companies.