The International Accounting Standards Board (IASB) outlined in a document the likely practical effects of the forthcoming leases standard which would require companies to bring leases onto the balance sheet.
Deliberations by the IASB on the new accounting model for leases will be completed this month and the final standard is scheduled to be issued later this year.
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"The main change that will be brought about by the new Leases Standard is an increase in assets and liabilities on the balance sheet for those companies that currently have a large amount of leases off balance sheet, thus improving the transparency of a company’s leverage and asset base," said Hans Hoogervorst, chairman of the IASB.
In addition to changes to the balance sheet, the new leases standard is likely to result in some important differences on the income statement. Among them is the reporting of higher operating profit compared to the current requirements – and in comparison to the model of the US Financial Accounting Standards Board (FASB).
There will be no changes to total cash flows but, in the cash flow statement, the amount of operating cash will increase while the amount of financing cash will decrease.
IASB also discussed about other potential implications of the leases accounting model, such as the possible impact on the cost of borrowing.
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By GlobalDataThe new standard will provide more transparent information about a company’s financial commitments, but does not change those commitments. Therefore, should the Standard affect the cost of borrowing for a company, this will be because the improved reporting provides lenders with new information that is relevant and important to their decision making.
The effects of the new Leases Standard will also be discussed at the next Accounting Standards Advisory Forum meeting at the end of March.
