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Embarking on a new era of lease accounting

11 October 2016

With the release of the new leasing standard IFRS 16, the International Accounting Standards Board (IASB) replaced the previous standard on lease accounting IAS 17. The main changes apply to lessees’ lease accounting. The new standard requires lessees to recognise all leases on the balance sheet, with recognition exemptions only applying to low-value and short-term leases. The IASB estimates that - because of IAS 17 - about 85 per cent of the lease commitments with a value of US $ 3,3 trillion do not appear on companies’ balance sheets worldwide. US-GAAP reporting firms are also facing a new leasing standard. With the release of ASC 842, the Financial
Accounting Standards Board (FASB) put an end to the off-balance accounting of leases, like the IASB with regard toIFRS 16.

For lessees, compliance with the new leasing standard poses quite a challenge. In practice, the members of BDO’s Department of Accounting Advisory observe an increasing gap between the accounting requirements and - in particular by medium-sized firms - the possibilities to react to them. Firms cannot shun the requirements of the application of IFRS 16 and ASC 842. The only option would be to forfeit tenancies
as a whole. The new leasing standard is applicable across companies and sectors; thus it does not only affect companies with complex transactions.

As a consequence, all firms need to address the accounting and implementation challenges of the new leasing standard if they are lessors and/or lessees. Generally, this is a more complex task for large than for small firms because of their complex IT system landscape. For all firms, a lack of personnel resources will be the bottleneck of the successful implementation of the new leasing standard. Thus, an early adoption of IFRS 16 – together with the challenges of IFRS 15 – is unlikely for many firms. On the next pages, we would like to inform you about the importance of leasing in Germany and Europe and the upcoming challenges from a practical point of view and simultaneously introduce BDO’s solutions for the implementation of IFRS 16 in your company.

We as BDO do not only assist you in the implementation of the new leasing standard. We also offer you the opportunity to entirely restructure your lease accounting with our IT supported tool BDO LEAD, thereby lifting your lease accounting to unprecedented levels.