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New transparency for lease obligations to be introduced in 2019

The newly released lease accounting standard brings transparency to lease obligations, bringing all leases onto the balance sheet.

After three decades, investors will now enjoy reliable information about leasing obligations, with less need for “rules of thumb” and guesses about the impact of lease obligations on a lessee’s debt gearing/leverage. The change will be effective 1 January 2019.

Up to now, accounting has not been fully reflecting the economics of leasing transactions with analysts routinely making adjustments for operating leases.

Changes include:
• Leases categorised as “finance leases” are reported on a balance sheet.
• Lessor accounting will remain largely unchanged.
• For lessees, the lease obligations and other loan obligations will have consistent accounting treatments.
Bringing operating leases onto the balance sheet will allow greater control over the information that analysts will use.

The application of the new standard could reduce the amount of additional information entities would ordinarily release about their lease commitments in response to analyst queries.

The standard issued by the IASB will be considered by the AASB at its February meeting, for adoption in Australia.

The IASB expects that this change will impact an estimated USD 3.3 trillion leasing commitments of listed entities using IFRS or US GAAP, with 43% of those listed entities reporting in the Asia / Pacific region.

Capturing more detailed information about operating leases on the balance sheet may also lead to better decision making from management as has occurred in other circumstances such as share-based payments and defined benefit funds.

For more information or to read original story visit AASB website’s announcement

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