Mazars Durban - ALL LEASES CREATE ASSETS AND LIABILITIES2016-03-08
Current International Financial Reporting Standards (“IFRSâ€) require operating leases to be expensed as incurred on a straight-line basis. Entities are not permitted to recognise liabilities upon entering into operating leases, unless the contract is “onerousâ€.
These will be expensed as incurred. The standard’s objective is to capture those significant lease liabilities that are currently missing from the statement of financial position, such as property leases and “yellow assets†(large items of plant and machinery) used on construction sites. But what is a lease?The new standard describes a lease as “the right to use an asset for a period of timeâ€. That might sound straight-forward, but determining whether an arrangement is a lease is sometimes easier said than done.As an example: Imagine that you have decided to go on a cruise around the world for a year. You’ve contracted with an international travel company to provide a boat together with an experienced captain. The captain has extensive sailing experience in sailing around the world and knows all the applicable routes and ports. Are you leasing a boat, or are you receiving a service - being shipped around the world for a year? In determining whether the arrangement is a lease, you are required to determine whether you control the use of the boat, by asking:
If you do not have the above rights, you have not leased a boat, but have instead received a travel service. What about lessors?The existing accounting by lessors remains substantially unchanged from the current treatment, the only change being that “finance leases†are now “Type A†leases and "operating leases" are now “Type B†leases.Adopting the new standardThe standard is effective for years beginning on or after 1 January 2019 and will require retrospective application, requiring entities to calculate the effect of the new standard on prior periods as well as the current period. Entities have the option to restate their prior year figures for the adoption of the standard; alternatively, the effect on prior years is posted to opening retained earnings in the current year.Entities need to start looking at their lease agreements as soon as possible, identifying exactly what is being “leasedâ€, whether they would fall into the exemption and whether certain services need to be considered for separate recognition, all this before even starting to measure the assets and liabilities to be recognised. Don’t wait to start assessing your leases or you might find yourself running out of time. |
|
||