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Applying IFRS: New IASB leases standard — engineering and construction

July 27, 2018


Abstract : This publication of Ernst & Young (EY) summarizes the key implications of new standard on E&C entities and describes some sector-specific issues that E&C entities may wish to consider.

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Engineering and construction (E&C) entities will need to change certain lease accounting practices when implementing IFRS 16 Leases, the new leases standard issued by the International Accounting Standards Board (IASB). IFRS 16 significantly changes the accounting for leases by lessees and could have far-reaching implications for E&C entities’ finances and operations. For example, IFRS 16 may require E&C entities to recognise assets and liabilities for leases of construction equipment and office space they currently account for as operating leases.

Lessor accounting is substantially unchanged from current accounting. As with IAS 17 Leases, IFRS 16 requires lessors to classify their leases into two types: finance and operating leases. Lease classification determines how and when a lessor recognises lease revenue and what assets a lessor records. The profit or loss recognition pattern for lessors is not expected to change. This will be a relief for many E&C entities, because, based on the IASB’s discussions during the project deliberations, lessors were concerned about the extent of the changes in lessor accounting.

IFRS 16 requires lessees to recognise most leases on their balance sheets as lease liabilities with corresponding right-of-use assets. Lessees apply a single model for most leases. Generally, the profit or loss recognition pattern will change as interest and depreciation expense is recognised separately in the statement of profit or loss (similar to today’s finance lease accounting). However, lessees can make accounting policy elections to apply accounting similar to IAS 17’s operating lease accounting to ‘short-term’ leases and leases of ‘low-value’ assets.

IFRS 16 is effective for annual periods beginning on or after 1 January 2019. Early application is permitted provided that the new revenue standard, IFRS 15 Revenue from Contracts with Customers, has been or is applied at the same date as IFRS 16. Lessees must apply IFRS 16 using either a full retrospective or a modified retrospective approach.

This publication summarises the new standard and describes some sector-specific issues that E&C entities may wish to consider. Like all other entities, they will also need to apply the new standard to leases of office space, office equipment and all other assets within the scope of IFRS 16.

Apply-Leases-construction-October2016.pdf

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Keyword: and construction Engineering IFRS

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