Accounting For Finance And Operating Leases – A Simpler Way Forward

The difference in treatment between finance leases and operating leases has, for years, stood out as an inconsistent fillip of established accounting practice. Now the International Accounting Standard Board has developed a regime that will allow all leases to be treated the same way, and has published new rules (in IFRS 16) to that effect, with an effective date of 1 January 2019. The new rules will have knock on effects for reporting under both IFRS and UK GAAP standards.

The proposed rules are still filled with caveats and exemptions (leases with less than a year left to run or leases of low-value assets, for example). Without going into the detail of the rules (which, effectively, record leases on balance sheet as assets and liabilities and then allow the asset to depreciate in a straight line over time whilst accounting for interest costs repaid over time), it is clear that the rules will have some impact on the figures companies report.