The IASB recently discussed how to respond to stakeholder feedback on the Request for Information Post-implementation Review of IFRS 16 Leases. 

The staff paper indicates that many stakeholders commented on the ongoing costs for lessees of applying the IFRS 16 measurement requirenents. Among other feedback, they find “many aspects of the Standard very complex to apply and not always possible to automate, in particular, those requiring significant judgements. Therefore, stakeholders said, entities incur high costs of continuous training of personnel across different functions and sometimes have to engage external consultants to assist with applying the measurement requirements in IFRS 16.”

One of the recurring issues in this area: the standard requires remeasuring the lease liability to to reflect any reassessment or lease modifications, or to reflect revised in-substance fixed lease payments. Most stakeholders (the staff paper says this includes almost all accountancy bodies, most global accounting firms, many preparers and many standard-setters, mostly from Latin America, Europe and Asia-Oceania), who commented on the ongoing costs of applying IFRS 16 expressed concerns about the cost–benefit balance of these requirements. Issues included the frequency of remeasurements being higher than the IASB expected, with consequences that are costly but often result in immaterial information; and the requirements being generally complex to understand and apply, with particularly costly elements including determining revised discount rates, and accounting for the change in lease payments that depend on an index or a rate.

Stakeholder suggestions included reducing the frequency of when the lease liability is required to be remeasured, for example by introducing a practical expedient (perhaps tied to a quantitative threshold) for minor changes in lease arrangements; and permitting an entity to use the originally determined discount rate. The staff paper seems skeptical that the IASB could realistically provide any forms of relief that would significantly reduce costs for preparers without having a negative effect on the usefulness of information. Still, on balance, the staff recommended that the IASB add to its project pipeline a research project in this area, and the board tentatively agreed.

The paper covers another burdensome area: “A few stakeholders noted that even though lessees are required to remeasure the lease liability only when there is a change in future lease payments resulting from a change in an index or a rate (instead of at each reporting date), it is still costly to apply the requirement, especially when entities are subject to high inflation or hyperinflation (and indices or rates change frequently).” On this topic, the FASB already allows issuers to remeasure such a lease liability only when triggered by reasons other than changes to an index or a rate (for example, a change in lease term or lease modification): one apparent possibility is for the IASB to allow a similar simplification. The board tentatively decided to explore that further as well.

Many stakeholders also cited the requirement to determine discount rates (or revised discount rates) as one of the major ongoing cost drivers: “They said that the determination and periodic updates of discount rates are complex, involve significant judgement, and in some cases requires the use of external consultants. Stakeholders said this affects in particular entities with activities in multiple jurisdictions and in volatile markets with frequently changing interest rates, or private entities with no observable credit ratings or no debt portfolio that could provide reliable benchmark rates as a starting point.” Suggestions included permitting a lessee to use a risk-free rate, a rate of a parent, an obtainable borrowing rate or a benchmark rate established by local financial regulators instead of the incremental borrowing rate; or to use an unchanged discount rate when remeasuring lease liabilities for those reassessments and lease modifications that currently require the use of a revised discount rate. That area also made the IASB’s cut for further exploration and research.

That leaves plenty of cost-reduction ideas that the IASB tentatively decided (not always unanimously) not to pursue. They include the clarity of guidance for remeasuring the lease liability; other aspects of the clarity of guidance for determining discount rates; recognition exemptions; disclosure requirements; the clarity of guidance for portfolio application of IFRS 16; intragroup leases; and the requirements for determining lease terms. They also tentatively decided not to explore making targeted improvements to requirements affecting the usefulness of information resulting from lessees applying judgement (such as developing specific requirements for lessees to disclose significant judgements made in determining the lease term or discount rate), not to simplify the requirement for determining the lease term, and not to develop additional guidance or disclosure requirements in various other areas.

For the IFRS 16 haters out there (and there do seem to be some), the bad news is that whatever amendments to the standard may eventually result from the IASB’s current efforts, they’ll leave it much more the same than different…

The opinions expressed are solely those of the author.