The significant changes in IFRS16 Lessees recently took place has change the entire landscape in the subject. Since 1 January 2019, the IFRS 16 Leases are in full effect and superseded the IAS’s 17 Leases, introducing a unprecedent way of accounting for leases in Singapore.
The new Standard (Also see Accounting Standards in Singapore) require the lessee to categorise the leases no more (previously used to categorised into operating and finance lease). From 2019 onward, all leases will be “capitalised” by recognising the asset (as right-of-use in the balance sheet) and the liability of a lease, save for short-term lease and low value assets. There is however not much changes from the lessor’s perspective since lessor’s books has recognised the arrangement as asset in both scenarios even prior to the change.
The core distinction between operating and finance leases is hence removed for lessees, offering higher comparability of the financial statements as a result. This inevitably help to curb window dressing practices (off-balance sheet finance) in the financial statements (Also see What Investors Want To See In Your Financial Statements?) via leases.
Lessees need to recognise a right-of-use asset as well as lease liability at the very beginning of the transaction using the aggregated discounted payments needed under the lease, if it fails the short-term lease or the low value assets exemption.
Unfortunately, the benefit of alignment of reporting format does not come without cost. The lessee would need to take more factors into consideration than he ever would before the change, especially the lease term, discount factor, renewal option, initial direct cost, restoration cost etc.
As mentioned above, it is somewhat threatening for business owners without accounting background especially when it involves the concept of time value of money that is widely used in the finance world. No worries, one alternative is then to engage an accounting service in Singapore and let the experts manage for you.