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1.2 Key impacts
Identifying all lease agreements and extracting lease data. Lessees will now
recognise most leases on-balance sheet. This may require a substantial effort to
identify all leases with payments that should be included in the lease liability, and
whether subsequent modifications result in accounting for a separate lease and/or
remeasurement of the lease liability and the right-of-use asset.
New estimates and judgements. The new standard introduces new estimates
and judgements that affect the measurement of lease liabilities. A lessee
determines the liability at commencement and may be required to revise it – e.g.
when the lease term is modified. This will require ongoing monitoring and increase
financial statement volatility.
Balance sheet volatility. The new standard introduces financial statement
volatility to assets and liabilities for lessees and lessors, due to the requirements
to account for lease modifications. This may impact a company’s ability to
accurately predict and forecast results and will require ongoing monitoring (see
Chapters 3 and 4).
Changes in contract terms and business practices. To minimise the impact
of the new standard, some companies may wish to reconsider certain contract
terms and business practices – e.g. changes in the structuring or pricing of a lease
agreement, including the inclusion of options in the contract to avoid subsequent
lease modifications. The new standard is therefore likely to affect departments
beyond financial reporting – including treasury, tax, legal, procurement, real estate,
budgeting, sales, internal audit and IT.
New systems and processes. Companies should ensure that they have systems
and processes enabling them to identify and measure completely and in a timely
manner the commencement of new leases, and the modification, reassessment
or impairment-triggering events of existing ones. This becomes even more
important when leasing is decentralised and undertaken by non-accountants.
Transition considerations. A key early decision is which transition option to
adopt. The extent of information required by lessees in 2019 will depend on the
transition approach chosen – e.g. under a modified retrospective approach, if the
lessee elects to measure the right-of-use asset at an amount equal to the lease
liability, then no historical information about modifications before the date of initial
application is needed. Under the retrospective approach, or if a lessee using the
modified retrospective approach elects to recreate the right-of-use asset from the
commencement date, modifications will need to be reconstructed.
Careful communication with stakeholders. Investors and other stakeholders will
want to understand the new standard’s impact on the business. Areas of interest
may include the effect on financial results, the costs of implementation and any
proposed changes to business practices.
Sufficient documentation. The judgements, assumptions and estimates applied
in determining how to measure the lease liability at the commencement date, as
well as when a modification occurs, will need to be documented.
1 At a glance
3
1.2 Key impacts