When it comes to implementing the new lease standard IFRS 16, preparers of financial statements in the shipping industry have a number of choices about transition. It’s important to think through these options in good time.
Entities can, for example, choose not to reassess whether a contract is or is not a lease, but simply apply IFRS 16 to contracts that were leases under the current standard, IAS 17.
Lessees then have other choices to make. Having identified the leases to which IFRS 16 applies, lessees can either apply changes retrospectively to all prior periods presented, or leave the comparative figures as previously shown but account for the cumulative impact of adopting IFRS 16 as an adjustment to the opening position as at the date of initial application. The latter is called a ‘modified retrospective approach’.
If they take this second option, lessees with leases that were previously accounted for as operating leases under IAS 17 have a further choice to make concerning how they determine the right of use asset. This can either be set equal to the amount of the lease liability, adjusted for any prepaid or accrued amounts, or determined as if IFRS 16 had been applied since commencement of the lease, but applying the discount rate used to calculate the lease liability (the incremental borrowing rate as at the date of initial application).
For leases classified as finance leases under IAS 17, broadly the existing treatment will continue. The carrying amount at the date of initial application of the lease asset and lease liability will be the right of use asset and lease liability under IFRS 16.
Some specific disclosures are required as part of the transition under the modified retrospective approach, including the weighted average incremental borrowing rate used for the lease liabilities. Reporting entities must also explain the difference between operating lease commitments disclosed in the last financial statements prepared under IAS 17, discounted at the incremental borrowing rate, and the lease liabilities recognised at the date of initial application of IFRS 16.
Turning to lessors, no adjustments are required on transition to the new standard except where the lessor is an intermediate lessor. Lessors that charter in and charter out vessels will have to reassess whether the leases out should continue to be accounted for as operating leases or be classified as finance leases. The assessment is based upon whether substantially all the risks and rewards that have been chartered in are now charted out. On transition, this assessment is based on the position, and remaining terms, as at the date of initial application.
For additional details on transition accounting issues and how to handle them, including how to treat sale and leaseback transactions, please see our
factsheet.