IAASA, Ireland’s accounting enforcer, has today published an Information Note setting out how companies have accounted for leases under IFRS 16 – Leases, the new leases accounting standard.
IAASA has identified scope for improvement in the disclosures made in companies’ first set of annual financial statements following their adoption of the Standard.
Overall, IAASA noted that most annual financial statements reviewed provided sufficient information to enable users of the financial statements to understand the impact of adopting IFRS 16.
The desktop review identified areas where issuers could further improve their disclosures in future financial statements and thereby enhance users’ understanding of the impact of leasing on the issuer’s operations.
IAASA recognises that, as a whole, disclosures provided by companies in the first full year of application of IFRS 16 were broadly in compliance with the accounting standard. IAASA will continue to monitor companies’ accounting treatments and, in particular, will likely closely examine the areas noted below.
Key findings are that improvements could be made in a number of areas:
Significant accounting judgements and sources of estimation uncertainty
Significant accounting judgements
Disclosure of the judgements made by management regarding IFRS 16 were not always sufficiently granular and failed to provide users with a clear understanding as to what were the specific judgements, why it was necessary for management to exercise such judgements and the factors management considered when making those judgements
Sources of estimation uncertainty
Certain disclosures did not provide sufficient information on how the weighted average incremental borrowing rate for leases was determined or include sufficient detail on the material assumptions applied by management in determining the rate
Measurement of lease liabilities
Disclosures contained boilerplate language to describe issuers’ accounting policies relating to the measurement of lease liabilities, with a lack of issuer-specific information
Short-term transitional expedients v. short-term recognition exceptions
Issuers did not clearly distinguish between IFRS 16.C10 and IFRS 16.5 and amalgamated on-going accounting policy choices in the same paragraphs as the transitional expedients
Future cash outflows potentially exposed to that are not reflected in the measurement of the lease liability
Additional information required by IFRS 16.59(b) was not clearly disclosed. This omission could impede users’ understanding of the potential impact on lease balances of judgements made about unrecognised options
Variable lease payments
Although most issuers stated within the accounting policies that the lease liability included variable payments, some did not disclose the amount of variable lease payments included in their lease liability measurement and failed to provide the information required by IFRS 16.51 and, in certain cases, IFRS 16.B49
In certain instances, it was noted that issuers provided broad time bands when disclosing the liquidity analysis for lease liabilities, especially for instances where more than 50% of their overall lease liabilities fell due after more than five years
Changes in liabilities arising from financing activities
In certain instances, lease liabilities were not separately disclosed in the movements in liabilities arising from financing activities table (IAS 7.44A)
Finally, IAASA notes that the amendment to IFRS 16 introduced to address COVID-19-related rent concessions, may be of particular relevance for companies in their 2020 annual financial statements.
The Information Note is available here.