Effects Analysis | IFRS 16 Leases | January 2016 | 35
Determining the discount rate
The IASB expects companies with material off balance
sheet leases to incur costs in measuring lease assets
and lease liabilities at the present value of future lease
payments. This is mainly due to the need to determine
a discount rate for each lease (other than short-term
leases and leases of low-value assets), assuming that
the effects of discounting are material to the company.
In order to provide the disclosures required by IAS 17,
companies already need to have an inventory of leases,
and information about the lease term and future
lease payments for each lease. Accordingly, costs are
not expected to increase to gather the other
information required.
To mitigate costs for off balance sheet leases existing
when first applying IFRS 16, companies are permitted to
use the incremental borrowing rate at the date of initial
application for each portfolio of similar leases.
Communication and education
The IASB expects that companies with material off
balance sheet leases will incur costs in educating staff
and updating internal procedures.
Those costs are expected to be less significant for
companies that have finance leases applying IAS 17, and
more significant for those that do not. This is because
the accounting required by IFRS16 is similar to the
accounting requirements for finance leases in IAS 17.
For some industry sectors, the IASB expects that
education may be required in determining whether a
contract contains a lease because of the complexity of
some industry-specific agreements.
The IASB also expects that companies will incur
costs in communicating significant changes to their
reported information to external parties (for example,
the investor community and lenders). Any costs are
expected to be incurred when first communicating the
changes and, accordingly, are expected to be incurred
only when first implementing IFRS 16.
The IASB expects that the communication will mainly
relate to explaining the effect on the particular
company’s reported financial information—ie companies
will not need to explain the accounting. This is because
the accounting applying IFRS 16 is similar to that for
finance leases in IAS 17, which investors and analysts
already understand and use when making adjustments
for off balance sheet leases.
IFRS compared to US GAAP
The IASB expects the costs of implementing IFRS 16 to
be broadly similar to those of implementing the FASB
model. The IASB’s considerations in this respect are
reported in Section 8—Effects of differences between IFRS and
USGAAP.
As with all new requirements, there will be a period
of education and adjustment for users of financial
statements, during which they may incur costs. Those
costs may include costs to modify their processes
and analyses. However, the costs are likely to be
non-recurring, and are expected to be significantly
outweighed by the longer-term benefits of having more
transparent and accurate information provided by
IFRS16 about off balance sheet leases.
In the IASB’s view, the greater comparability and
consistency of reporting leases applying IFRS 16 justifies
the costs that users of financial statements and others
may initially incur.
Investors and analysts
The IASB expects the cost of analysis for investors and
analysts to decrease once they have updated their
methodologies to analyse a lessee’s financial statements.
This is because the IASB expects the information about
off balance sheet leases reported by companies applying
IFRS 16 to be more accurate than the estimates previously
developed by many investors and analysts (for example,
estimates of the present value of off balance sheet lease
commitments and estimates of the interest expense
related to those commitments).
The IASB expects many investors and analysts (including
some of those who made adjustments for off balance
sheet leases applying IAS 17) to rely solely on the
improved information provided in the balance sheet,
income statement and cash flow statement. However,
other investors and analysts are expected to continue
to make adjustments to suit their needs, but those
adjustments are expected to be made on the basis of
more useful information available in a company’s
financial statements (including in the notes).
Regulators and tax authorities
The IASB expects regulators and tax authorities to incur
costs relating to IFRS 16 if their respective regulations
depend on the accounting in IAS 17. This is because
they may need to consider the effect of this change in
accounting on their requirements.
The associated costs are expected to vary by jurisdiction
based on local requirements.
Costs for other stakeholders