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The International Accounting Standards Board (IASB) has unveiled new accounting standards which attempt to create transparency around lease obligations, bringing all leases onto the balance sheet.
IFRS 16 Leases replaces accounting requirements introduced more than 30 years ago that the IASB says are no longer considered "fit for purpose".
The IASB noted that previously leases have been categorised as either finance leases (which are reported on the balance sheet), or operating leases (which are disclosed only in the notes to the financial statements). The new standard attempts to solve this issue by requiring all leases to be reported on a company's balance sheet as assets and liabilities.
"These new accounting requirements bring lease accounting into the 21st century, ending the guesswork involved when calculating a company's often-substantial lease obligations," the board stated.
"The new standard will provide much-needed transparency on companies' lease assets and liabilities, meaning that off balance sheet lease financing is no longer lurking in the shadows. It will also improve comparability between companies that lease and those that borrow to buy."
Commenting on the changes, the Australian Accounting Standards Board (AASB) noted that bringing operating leases onto the balance sheet will require a significant amount of effort for preparers, however they will benefit from having greater control over the information that analysts will use.
Kris Peach, chair of the AASB noted that lease accounting has now taken a significant step forward.
"The quest to bring all leases on to the balance sheet has been controversial. However, both the IASB and the AASB have conducted multiple rounds of consultations and extensive public board considerations."