Achieving greater transparency: Important changes to lessee accounting

Overview

Now that the new lease accounting standard, NZ IFRS 16 Leases, is effective for companies reporting in accordance with NZ IFRS, the impacts of the new lease accounting requirements are being reflected in companies’ market announcements, interim financial statements and annual financial statements. The new requirements see lessees bringing almost all of their leases on to the balance sheet, and will affect reported performance measures, such as EBITDA and EBIT or Operating Profit. 

Bringing leases on to the balance sheet increases visibility over companies’ lease obligations, resulting in financial statements which better reflect companies’ solvency – an important measure for many investors.  Such transparency is critical to maintaining confidence in our capital markets, especially given the global economic impact of the COVID-19 pandemic.

Nevertheless, the rationale behind the new requirements is questioned by some, and as a result is receiving growing attention around the boardroom table.

Jane Taylor, a Professional Director, and Gali Slyuzberg, a staff member of the External Reporting Board, shed some light on the new lease accounting requirements. They explain why the requirements were introduced and how they aim to improve financial reporting. They also discuss a new practical expedient for lessees in response to the COVID-19 pandemic.

NZ IFRS 16 Leases: Quick facts

• Introduces requirements for lessees reporting in accordance with NZ IFRS to bring virtually all leases on to the balance sheet
• Lessor accounting remains substantially unchanged
• Became effective for entities with 31 December 2019 year ends and onwards
• There are transition options and practical expedients to help with the initial application of the standard

Authors:
Jane Taylor
Deputy Chair External Reporting Board.

Gali Slyuzberg
Project Manager External Reporting Board.