IFRS 16 Leases - How cost-effective is it?

What’s the issue?

As part of the post-implementation review of IFRS 16 Leases (IFRS 16), the International Accounting Standards Board (IASB) has published a Request for Information (RFI) from stakeholders.

IFRS 16 has, of course, been effective since 1 January 2019; however, the IASB seeks to carry out a PIR (post-implementation review) of all new IFRS Accounting Standards, or major amendments, around 2-3 years after the requirements have been implemented as part of its due process. This is to assess the overall effectiveness and cost-benefit that the Standard, or amendment, brings, i.e. whether it is working as intended and is delivering the expected benefits.

What does this mean?

Based on the information that will be gathered from this RFI on IFRS 16, the IASB aims to assess, in particular, whether the Standard is functioning overall as intended and is not causing excessive costs, and whether the Standard is/can be applied consistently by entities. Ultimately, the aim is to seek to identify if any amendments may be necessary to the Standard, or maybe if any additional guidance or educational materials should be issued to make the requirements easier to apply.

Entities are therefore encouraged to provide feedback on the specific questions (summarised below), focusing on areas where the requirements are unclear, incomplete, create unintended consequences or require greater than expected costs. And whilst there is an open question at the end asking where any further aspects should be investigated, the IASB will intend to focus on the more significant matters that bear on the overall effectiveness of IFRS 16.

The Request for Information has six sections

Section 1: Overall assessment

This section asks stakeholders whether:

IFRS 16 has achieved its objective;
its core principles are clear;
the Standard improves the overall quality and comparability of financial information about leases; and
the ongoing costs of application are largely as expected.

Section 2: Usefulness of information resulting from lessees’ application of judgement

This section asks stakeholders whether:

the usefulness of information resulting from lessees’ application of judgement (including information about duration, discount rates or variable consideration) is largely as expected;
the requirements provide a clear and sufficient basis for entities to make appropriate judgements, and can be applied consistently; and
the usefulness of financial information resulting from lessees’ application of judgement should be improved, and if so, what amendments should be made and how the benefits of these amendments would outweigh their costs?

Section 3: Usefulness of information about lessees’ lease-related cash flows

This section asks stakeholders whether:

the quality and comparability of financial information about lease-related cash flows that lessees present are largely as expected; and
if not, why not?

Section 4: Ongoing costs for lessees of applying the measurement requirements

This section asks stakeholders whether:

lessees’ ongoing costs of applying the measurement requirements are largely as expected; and
if not, why is this so and how could the IASB reduce these costs without significantly affecting the usefulness of the information provided

Section 5: Potential improvements to transition requirements in future standards

This section asks stakeholders whether their experience of the transition to IFRS 16 leads them to recommend that the IASB should do anything differently when developing transition requirements in future standard-setting projects.

Section 6: Other matters relevant to the assessment of the effects of IFRS 16

This last section mainly addresses the interactions between IFRS 16 and other standards.

The first issue concerns the interactions between IFRS 16 and IFRS 9 Financial Instruments. Stakeholders are asked:

how often they have observed rent concessions, with no other amendment to the lease, resulting in partial extinguishment of the lessee’s lease liability;
whether they have observed diversity in how lessees account for these rent concessions and how far that has had a material effect on the amounts reported and the usefulness of the information; and
whether the IASB should improve the clarity of the IFRS 16 requirements, and if so, what amendments should be made and how the benefits of these amendments would outweigh their costs.

It then turns to the interactions between IFRS 16 and IFRS 15 Revenue from Contracts with Customers in two areas, the first of which concerns the transfer of control of an asset in a sale and leaseback transaction.

Stakeholders are asked:

how often they have encountered difficulties in assessing whether the transfer of an asset in a sale and leaseback transaction constitutes a sale;
whether they have observed diversity in seller–lessees’ assessments of the transfer of control that has had, or is expected to have, a material quantitative effect, thereby reducing the usefulness of information; and
whether the IASB should act to help seller-lessees determine whether the transfer of an asset is a sale, and if so, what solution they propose and how the benefits of the solution would outweigh their costs.

The second aspect of the interaction between IFRS 16 and IFRS 15 concerns the recognition of gains or losses on sale and leaseback transactions.

Stakeholders are asked:

whether restricting the amount of gain (or loss) an entity recognises in a sale and leaseback transaction results in useful information;
whether the costs of applying the partial gain or loss recognition requirements, and the usefulness of the resulting information, differ significantly from what was expected; and
whether the IASB should improve the cost-benefit balance of applying the partial gain or loss recognition requirements. If so, stakeholders are asked to describe their proposed solutions.

Finally, the RFI concludes with an open question regarding any further matters that should be examined as part of the IFRS 16 PIR and why, in light of the objective of a post-implementation review