Disclosure of the expected impact of IFRS/PFRS 16 Leases

At a glance

IFRS/PFRS 16, the new accounting standard for leases, becomes effective for annual reporting periods commencing on or after 1 January 2019. As with other new accounting standards, IFRS/PFRS reporters are required to disclose information relevant to assessing the impact of IFRS/PFRS 16 in periods prior to adoption.

The 2018 annual reporting period is the final reporting period prior to the mandatory adoption of IFRS/PFRS 16; and, by the time that companies publish their 2018 annual reports, they will have implemented IFRS/PFRS 16.

What is the issue?

Paragraphs 30 and 31 of IAS/PAS 8, ‘Accounting Policies, Changes in Accounting Estimates and Errors’, detail the disclosure requirements for the expected impact of new accounting standards which have not yet been adopted. In particular, IAS/PAS 8 requires entities to disclose known or reasonably estimable information relevant to assessing the possible impact that application of IFRS/PFRS 16 will have on an entity’s financial statements in the period of initial application.

It is therefore important that entities carefully consider the expected impact of IFRS/PFRS 16, to provide specific and meaningful disclosure.

What is the impact and for whom?

Practical suggestions for robust disclosure of the impact of IFRS/PFRS 16

All entities with leases, or arrangements where significant judgement has been made in assessing whether it contains a lease, will need to consider their disclosure of the expected impact of IFRS/PFRS 16. Entities without leases should consider disclosing the fact that IFRS/PFRS 16 is not expected to impact them.

With reference to the requirements of IAS/PAS 8, we set out below our practical suggestions of matters for entities to consider disclosing in relation to the expected impact of IFRS/PFRS 16.These practical suggestions are solely an indicative guide of how an entity could respond to the need to disclose the impact of IFRS/PFRS 16. Disclosures should be entity-specific, and each entity should consider what disclosures best meet the requirements of IAS/PAS 8 and regulator expectations, based on their specific facts and circumstances.

• Disclose the fact that IFRS/PFRS 16: Leases has not yet been applied, that it is applicable for annual reporting periods commencing 1 January 2019, and the date on which the entity expects to first apply IFRS/PFRS 16.
• Information about the structure and status of the entity’s implementation project.
• A description of the changes in accounting policy which will take effect, including whether exemptions will be applied (such as low-value or short-term exemptions).
• A description of which transition approach will be taken, and whether any practical expedients will be applied.
• A description of the key judgements and estimates made (such as assessing whether an arrangement contains a lease, determining the lease term, calculating the discount rate and whether any service/lease components of arrangements will be separated), and identifying lease portfolios for which IFRS/PFRS 16 has a significant impact.
• Quantification of the expected impact (restatement to assets, liabilities and retained earnings/opening retained earnings adjustment, or the change in assets, liabilities, income, expense on adoption, depending on transition approach).
• If taking the simplified transition approach, an explanation of any differences between the current operating lease commitment disclosure and IFRS/PFRS 16 lease liability balances, and a statement that lease liability comparative information has not been restated.

When does it apply?

IFRS/PFRS 16 applies for annual reporting periods beginning on or after 1 January 2019. Therefore there is an expectation, as explained above, that disclosures within the 2018 annual reports will sufficiently explain the expected impact of IFRS/PFRS 16, particularly given that 2018 annual reports will be released during 2019, after IFRS/ PFRS 16 has been adopted.