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Financial reporting landscape changes for companies leasing assets

Last Updated Jan 2018

Johannesburg 12 September 2017 - The new lease accounting standard, International Financial Reporting Standards 16 - leases (IFRS 16 – Leases) published by the International Accounting Standards Board (IASB) introduces a single lease accounting model which requires lessees (tenants) to recognise lease assets and lease liabilities. IFRS 16 aims to enhance the financial reporting of leases in the financial statements. The new lease accounting model will significantly impact a number of companies including those operating in the airline, retail, transport and telecommunications sectors.

“These new requirements are applicable to companies which are required to prepare financial statements in terms of IFRS including companies listed on the Johannesburg Stock Exchange and those required or opt-in in terms of the Companies Act 71 of 2008 to comply with IFRS and others required by legislation to comply with IFRS,” says Bongeka Nodada, SAICA’s Project Director: Financial Reporting.

The new lease accounting model will impact a company’s balance sheet, income statement and cash flow statement. As a consequence, this will affect a company’s key leverage ratios, debt covenants, staff performance bonuses, headline earnings, deferred tax, earnings before interest, tax, depreciation and amortisation.

“Lessees will be required to recognise a right-of-use asset representing the right to use the underlying asset and lease liability representing the obligation to make lease payments on its balance sheet,” explains Nodada. “This right-of-use asset will be amortised or subject to impairment and the interest expense will be recognised for the lease liability.”

The IASB has provided an exemption in respect of leases for short-term leases (or leases with a term of 12 months or less) or if the value of the underlying assets is of low value. The accounting model for these leases is similar to the operating leases model under the current leases standard (IAS 17 – Leases) in that lease payments are recognised as an expense in the income statement with no requirement to recognise the right-of-use asset and lease liability.

According to Nodada, the lease accounting model for lessors (landlords) has largely remained the same with additional disclosures being required.
IFRS 16 - Leases is effective for annual reporting periods commencing from 1 January 2019 and companies can elect to apply the standard earlier. Companies should also consider what disclosures to provide in the financial statements in respect of this standard which is not yet effective as per the requirements in IFRS (IAS 8 – Accounting Policies, Changes in Accounting Estimates and Errors).   

More information on IFRS 16 can be obtained from https://www.saica.co.za/Technical/FinancialReporting/TheNewLeasesStandard/tabid/3893/language/en-ZA/Default.aspx

About SAICA:

The South African Institute of Chartered Accountants (SAICA), South Africa’s pre-eminent accountancy body, is widely recognised as one of the world’s leading accounting institutes. The Institute provides a wide range of support services to more than 42 000 members who are chartered accountants [CAs(SA)] and hold positions as CEOs, MDs, board directors, business owners, chief financial officers, auditors and leaders in their spheres of business operation. Most of these members operate in commerce and industry, and play a significant role in the nation’s highly dynamic business sector and economic development.

SAICA Media Contact:

Kulani Chauke
Communications Coordinator: Corporate
SAICA Communications & Marketing Division
Tel: 011 479 0698
Email: kulanic@saica.co.za

Subject Matter Specialist:

Bongeka Nodada
Project Director: Financial Reporting
SAICA Standards Division
Tel: 011 621 6892
Email: bongekan@saica.co.za