Operating lease commitments - are your records accurate?
07 November 2018
As companies prepare for their final year end before adopting IFRS 16 it may be tempting to push preparation of the operating lease commitments disclosure to the bottom of the ‘to-do list’. After all, operating leases will soon be a thing of the past – for a lessee at least.
However, such an approach would be short sighted. This is because (in the first set of accounts prepared in accordance with the standard) IFRS 16 requires a lessee applying the modified retrospective approach to transition to disclose an explanation of any difference between:
- Operating lease commitments disclosed applying IAS 17 at the end of the annual reporting period immediately preceding the date of initial application, discounted using the incremental borrowing rate at the date of initial application; and
- Lease liabilities recognised in the statement of financial position at the date of initial application.
In order to provide such an explanation, it will be necessary for operating lease commitments disclosed under IAS 17 to be accurate and robustly supported by underlying records. If the disclosure is incomplete or inaccurate, the company may need to re-create the disclosure at a later date in order that relevant explanations for reconciling items, separately from errors, can be given.
Where an error is made in the disclosure of commitments under IAS 17, it is possible that regulator and investor attention will be drawn to it due to the transitional disclosure requirements of IFRS 16.
What should the transitional disclosure look like?
IFRS 16 is not prescriptive about the presentation of the explanation of differences. For companies with complex explanations, a numerical reconciliation will provide useful information and may be a sensible way of concisely and clearly presenting differences. Where the number of reconciling items is small, it may be possible to explain differences in narrative form.
What should companies do now?
Companies preparing their final set of accounts in accordance with IAS 17 should ensure they have robust procedures in place to prepare and review their disclosure of operating lease commitments. In particular, companies may wish to focus on:
- The completeness of the disclosure; ensuring that systems and controls are in place to identify all leases entered into across the whole business/group (including leases embedded within service contracts)
- Whether records accurately reflect the non-cancellable lease period for each lease; ensuring that systems and controls are in place to identify leases with more complex terms and that judgements relating to the non-cancellable period have been documented
- Whether records accurately reflect the minimum lease payment for each lease; ensuring that systems and controls are in place to ensure that leases with more complex payments structures are reviewed adequately and that judgements relating to minimum lease payment are documented.
Read more on IFRS16
Business Edge Index