The International Accounting Standards Board (IASB) has issued its leases standard that will require lessees to recognise all leases on their balance sheets, with certain exemptions. This will have the most impact on entities that have significant operating leases today, such as lessees of real estate, large equipment and machinery, and transportation vehicles.

Leo van der Tas, EY’s Global IFRS Services leader and partner Ernst & Young Accountants LLP (Netherlands), said: “We support the IASB’s efforts to improve accounting for leases by lessees. This will promote greater consistency in accounting for leases and increase comparability and transparency for stakeholders. Finalising the leases standard has been one of the key focuses for the IASB in recent years and it is encouraging to see it complete this major project.”

Many constituents raised concerns about the cost and complexity of implementing the IASB’s 2010 and 2013 proposals. Although the new standard will require lessees to apply a single on-balance sheet model, the IASB has kept a number of key concepts the same as today and introduced recognition exemptions for short-term leases and leases of low-value assets. Importantly, accounting for lessors remains largely unchanged from current requirements.

Mr van der Tas said: “The IASB has addressed some of the concerns raised by respondents about the cost and complexity of implementing the new standard. However, because most leases will be recognised on the balance sheet under the new standard, lessees will put more focus on whether an arrangement is or is not a lease. For contracts that include significant services, this assessment may be challenging.”

The leases project was a joint one between the IASB and the Financial Accounting Standards Board (FASB), with the latter expected to issue its new standard shortly. However, the two standards are not converged and a number of differences exist.

Mr van der Tas said: “The separate IASB and FASB standards will bring more leases onto lessees’ balance sheets. However, the differences between the standards are likely to reduce comparability between IFRS and US GAAP in respect of lease transactions compared to current standards.

“The standard is effective in 2019, with early adoption permitted in certain circumstances. For many entities, preparing for transition will require significant time and resources. Most leases will be recorded on a lessee’s balance sheet and so key ratios will change, such as gearing and net debt ratios.

“The income statement presentation will also change, which may change financial metrics such as EBITDA. Understanding the impact of these changes and communicating this to stakeholders will be critical.”