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Basis For Conclusions on IFRS 16 Effective Date and Early Application

Basis For Conclusions on IFRS 16 Effective Date and Early Application

Basis For Conclusions on IFRS 16 Effective Date and Early Application

In determining the effective date of IFRS 16, the IASB considered feedback received from preparers about the amount of time they would need to implement the requirements of IFRS 16 in the light of the transition requirements. The IASB also considered feedback received from both users and preparers of financial statements about the interaction of IFRS 16 with the implementation of other recently issued Standards (most notably IFRS 9 and IFRS 15).

The IASB acknowledged that users of financial statements would generally prefer the effective date of IFRS 16 to be 1 January 2018. This is because users would prefer IFRS 16 to have the same effective date as IFRS 9 and IFRS 15—this would avoid accounting uncertainty arising from entities implementing new Standards over a number of years. Users of financial statements also noted that, in their view, the effective date of IFRS 16 should be as soon as possible in the light of the significant improvements in financial reporting that will result from the implementation of IFRS 16. Consequently, they did not support a period of three years between publication of IFRS 16 and the effective date.

However, almost all preparers that provided feedback indicated that an effective date of 1 January 2018 would not give them adequate time to implement IFRS 16, IFRS 9 and IFRS 15. The majority of preparers reported that they would need approximately three years to implement the requirements of IFRS 16 between publication and the effective date.

Basis For Conclusions on IFRS 16 Effective Date and Early Application

The IASB concluded that implementation of IFRS 16 by 1 January 2018 would not be achievable for all preparers taking into consideration that entities are also required to implement IFRS 9 and IFRS 15 in that period of time. Consequently, the IASB decided that an entity is required to apply IFRS 16 for annual reporting periods beginning on or after 1 January 2019.

The IASB also decided to permit early application of IFRS 16 for entities that apply IFRS 15 on or before the date of initial application of IFRS 16. In reaching this decision, the IASB noted that early application would allow any entity that  wishes to apply IFRS 16 at the same time as IFRS 9 and IFRS 15 to do so. The IASBalso noted that early application might be beneficial to an entity that adopts IFRS for the first time between the publication of IFRS 16 and its effective date. However, the IASB decided to limit early application of IFRS 16 to entities that also apply IFRS 15. This is because some of the requirements of IFRS 16 depend on an entity also applying the requirements of IFRS 15 (and not the Standards that were superseded by IFRS 15).

Basis For Conclusions on IFRS 16 Effective Date and Early Application

Transition

Definition of a lease
The IASB decided that an entity is not required to reassess whether contracts are, or contain, leases on transition to IFRS 16. Consequently, an entity can choose to apply the requirements of IFRS 16 to all existing contracts that met the definition of a lease applying the requirements of IAS 17 and IFRIC 4. Similarly, an entity does not need to apply IFRS 16 to existing contracts that did not meet the definition of a lease applying the requirements of IAS 17 and IFRIC 4.

Preparers provided feedback that it could be costly for them to reassess all of their existing contracts using the definition of a lease requirements in IFRS 16. The IASB observed that it envisages only a limited number of scenarios in which application of the lease definition requirements in IFRIC 4 would result in a different outcome from the application of the lease definition guidance in IFRS 16. The IASB identified a small population of contracts that would be classified as leases applying IFRIC 4 but as service contracts applying IFRS 16, and none for which the converse is expected to be true. The IASB expects that the consequence of an entity not reassessing its existing contracts applying the lease definition requirements in IFRS 16 would be the recognition of slightly more leases on transition to IFRS 16 than would otherwise be the case. On this basis, the IASB concluded that the costs of requiring entities to reassess existing contracts applying the lease definition guidance in IFRS 16 would not be justified.

Basis For Conclusions on IFRS 16 Effective Date and Early Application

Lessees 
The IASB decided that, on transition, a lessee should apply IFRS 16 using either of the following methods:
(a) retrospectively to each prior reporting period presented applying IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors; or

(b) retrospectively with the cumulative effect of initially applying IFRS 16 recognised as an adjustment to the opening balance of retained earnings (or other component of equity, as appropriate) of the annual reporting period that includes the date of initial application. The IASB decided that, applying this approach, a lessee is permitted to apply some optional practical expedients on a lease-by-lease basis

Leases previously classified as operating leases
To reduce the costs of implementing IFRS 16, the IASB decided to introduce a number of additional practical expedients relating to leases previously classified as operating leases for a lessee that adopts the cumulative catch-up transition method.

Basis For Conclusions on IFRS 16 Effective Date and Early Application

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