companies to buy assets rather than lease them, though there was no consensus.

“Although it was claimed by firms that IFRS 16 was going to have that effect, there is no evidence that the IASB positively intended it,” Sellhorn remarks. “However, the IASB does feel that prior lessee accounting for most operating leases misrepresented economic reality, which might have contributed to a situation where more leasing was used than is economically efficient. If IFRS 16 should change that equilibrium, in terms of leasing being used less, the IASB will probably not lose sleep over it.”

Compliance, clarity and Covid Two years have passed since IFRS 16 took effect and the second of those years, 2020, has been hugely disruptive for many businesses. The Covid- 19 pandemic hit revenue in many sectors, of course. But in the context of leasing standards, it has also had a direct impact on the ability of lessees to pay their costs.

No wonder many governments acted swiftly to implement rent moratoria and similar measures to limit the financial impact of the pandemic on businesses and individuals. In many cases, lessor firms are granting rent concessions to their tenants and lessees – which are usually costly to account for, requiring a reassessment of the whole lease contract. To its credit, the IASB acted quickly to amend IFRS 16 with a practical expedient to accommodate pandemic-related issues around rent concessions, for instance publishing educational material on what key stakeholders needed to know. In May 2020, meanwhile, the board issued an amendment to IFRS 16, making it easier for lessees to account for Covid-19-related rent concessions, such as rent holidays and temporary rent reductions. The amendment also exempts lessees from having to examine individual lease contracts to decide if rent concessions occurring as a direct consequence of the pandemic are lease modifications. It further allows lessees to account for rent concessions as if they were not lease modifications. Currently, the IASB is looking at extending the period for which this amendment applies, depending on how well the spread of the pandemic is controlled and whether the impact of vaccines accelerates a return to normality for the economy. The IASB has shown both its desire to fully prepare the business community for new standards, and its ability to respond rapidly to events when companies need help complying.

While it is not the role of the IASB or the IFRS Foundation to monitor compliance, their clear communication and quick action has certainly helped businesses adopt the new standard.

Finance Director Europe /

“One important lesson is that the earlier a company starts preparing to implement a new standard, the better,” the IFRS tells Finance Director Europe. “So, from before IFRS 16 was issued, the board encouraged companies to start their implementation projects early. Evidence we are aware of shows that companies have managed to implement the new requirements, as we gave ample time – and a choice of different options – to companies applying IFRS 16 for the first time.” Broadly, IFRS 16 has been implemented with minimal problems, though for some businesses the task can still be onerous.

“I see that firms, especially those with a large number of operating leases, are struggling to capture all of these lease contracts in machine- readable form within their enterprise resource planning (ERP) systems,” notes Sellhorn. “Some firms have experimented with automated AI textual analysis tools offered by accounting firms and other service providers, but the performance of these systems has been somewhat disappointing. As a result, there is still a lot of repetitive manual work involved in lease accounting.”

Following the largely successful roll-out of IFRS 16 through testing times, eyes are now turning towards IFRS 17. This will bring about a big shake- up for insurance companies, which will be required to adopt a new model – one in which insurance liabilities are measured at a current fulfilment value, and which includes more uniform measurements for all insurance contracts. With so many jurisdictions adopting these new regulations, the impact of the new model will be felt across the board. The move reflects the IASB’s long-held aim to achieve a consistent, principle-based accounting methodology for insurance contracts. Recognising its profound impact on the industry, meanwhile, the IFRS has again given ample time for feedback and preparation. The

“The IASB does feel that prior lessee accounting for most operating leases misrepresented economic reality, which might have contributed to a situation where more leasing was used than is economically efficient.”

new standard was issued back in 2017 and has an effective start date of 1 January 2023. Running like a thread through its formulation, release and implementation of new standards, in short, is the willingness of the IFRS to consult, review and respond to market changes. The success of IFRS 16, and the amendments made in light of Covid, both bode well for the future. ●

39 144 The number of

jurisdictions requiring IFRS for all or most domestic publicly accountable entities (listed companies and financial institutions) in their capital markets. IFRS

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