New leases standard – what to disclose

As we discussed here, the IASB has issued IFRS 16 Leases, effective for annual reporting periods beginning on or after January 1, 2019.

We’ve already discussed some of the issues arising in identifying at inception of a contract whether that contract is a lease, or contains a lease, in determining the lease term, and in measuring the lease liability and asset and in presenting these balances, as well as the standard’s major scope exemption and issues relating to transition. Here now are the specific line-item disclosures set out for lessees (usually to be set out in a tabular format, unless another format is more appropriate):

  • (a) depreciation charge for right-of-use assets by class of underlying asset;
  • (b) interest expense on lease liabilities;
  • (c) the expense relating to short-term leases accounted for as we discussed here. This expense needn’t include the expense relating to leases with a lease term of one month or less;
  • (d) the expense relating to leases of low-value assets accounted for in the same way;
  • (e) the expense relating to variable lease payments not included in the measurement of lease liabilities;
  • (f) income from subleasing right-of-use assets;
  • (g) total cash outflow for leases;
  • (h) additions to right-of-use assets;
  • (i) gains or losses arising from sale and leaseback transactions; and
  • (j) the carrying amount of right-of-use assets at the end of the reporting period by class of underlying asset.

A lessee also discloses a maturity analysis of lease liabilities consistent with what’s set out in IFRS 7, separately from the maturity analyses of other financial liabilities. The IASB considered whether IFRS 16 should include more prescriptive requirements for a maturity analysis similar to that required by IAS 17 (for example, by requiring a lessee to disclose undiscounted lease payments in each of the first five years and a total for the periods thereafter), but in the end decided to allow lessees to apply judgement in selecting time bands for the maturity analysis. The IASB “thinks that, in a scenario in which disclosing undiscounted cash flows for each of the first five years and a total for the periods thereafter provides the most useful information to users of financial statements, the requirements of IFRS 7 should lead a lessee to disclose this level of detail. In contrast, in a scenario in which an alternative (and possibly more detailed) set of time bands provides the most useful information to users of financial statements, the requirements of IFRS 7 should lead a lessee to disclose that alternative and more useful set of time bands. For example, for a portfolio of 15–20 year leases, the requirements of IFRS 7 should lead a lessee to provide a more detailed maturity analysis than a single amount for the years beyond the fifth year.”

The lessee discloses the amount of its lease commitments for short-term leases accounted for as referenced above, if the portfolio of short-term leases to which it’s committed at the end of the reporting period is dissimilar to the portfolio of short-term leases to which the disclosed short-term lease expense relates. It seems this might apply, for instance, if an investee took out a whole bunch of one-year vehicle leases toward the end of the year. There’s no corresponding requirement to disclose such changes in the portfolio of low-value leases accounted for in the same way as short-term leases.

The standard also requires that a lessee disclose additional qualitative and quantitative information about its leasing activities necessary to give a basis for users to assess the effect of leases on its financial position, financial performance and cash flows. This information, it says, may include, but isn’t limited to, information that helps users of financial statements to assess the nature of the lessee’s leasing activities; future cash outflows to which the lessee is potentially exposed that aren’t reflected in the measurement of lease liabilities (such as exposure arising from variable lease payments, extension and termination options, residual value guarantees and leases not yet commenced to which it’s committed); restrictions or covenants imposed by leases; and sale and leaseback transactions. Examples of what to disclose might include discussion of the flexibility provided by and restrictions imposed by lease terms, and sensitivity of reported information to key variables.

The IASB is obviously sensitive to the disclosure overload concerns that might arise from all this, noting for example that this additional qualitative/quantitative information is provided “only if that information is expected to be relevant to users of financial statements.” More broadly, like anything else, it’s not necessary to disclose all or any of these items, if the information they provide wouldn’t be material (the IASB considered making this explicit, but didn’t do so, mainly because other standards don’t). But the board must also be aware that setting out three new pages of commentary (between the standard and the application guidance) on what should or might be disclosed in this area isn’t exactly building  a fast road to shorter financial statements. Still, it notes in the basis for conclusions that “many lessees will not need to provide any additional (qualitative and quantitative information). This is because the (basic line items and maturity analysis) are expected to provide sufficient information for those leases that do not have complex or unique features. In the IASB’s view, it is appropriate that greater cost will be required in preparing lease disclosures for entities whose leasing activity is particularly complex or unique.” Only time will tell, of course, whether the disclosure flowing from the standard does indeed generally seem relevant and meaningful (and is set out in a way that supports those qualities) or whether instead, as often as not, it’s just another few pages to be passed over while searching for the good stuff…

The opinions expressed are solely those of the author

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