Position Paper 04 April 2019
IFRS 16 & US GAAP-ASC 842: New Lease Obligations
Top Ten Lease Accounting Considerations for Investors
Learn how IFRS 16 and US GAAP-ASC 842 have affected lease accounting with CFA Institute. New lease obligations will impact balance sheet and cash flow reporting.
Leases: What Investors Need to Know About the New StandardRead the paper (PDF)
At long last, a company’s lease obligations – formerly buried in the back of the footnotes of the financial statements - are moving front and center onto the balance sheet, as a new leasing standard goes into effect for both US GAAP and IFRS companies at the beginning of this year.
CFA Institute has long advocated for recognition of lease obligations on the balance sheet, and while the measurement methodology does not incorporate our preferred method of reflecting current market conditions, we generally view this change in accounting as a positive development.
The new standard for leases is effective 1 January 2019 ,or just around the corner as the first quarter and half yearly results are being published. Because the vast majority of the change resulting from the leasing standard is related to lessee accounting, which has a broader impact for investors, this report focuses only on lessee accounting.
What’s changing? The short answer is that previously invisible leverage from leasing activities will now become visible, as all lease obligations will be presented as a liability on the balance sheet, offset by a “right of use asset,” representing the right to use the leased asset.
The longer answer is that analysts will need to do much more than look at the new lease liability on the balance sheet. Investors must understand the various methods of transition to the new standard, the fact that most companies won’t restate prior periods, and the differing treatment of leases under US GAAP and IFRS.
They will also have to understand the key assumptions underlying the new accounting, such as the discount rate selected, and how the changes in various financial statement Because many companies are not expected to restate prior years, comparability and trend analysis in financial statement captions and ratios will be difficult.
This paper will help investors unpack the impact to these ratios and adjust as necessary to ensure results are truly comparable.
This paper is designed to help our members and other investors understand the changes that are coming your way. We have focused on top 10 considerations including understand the following:
- Basics of new US GAAP and IFRS standard and their differences.
- Methods and implications of transitioning to the new standard under US GAAP and IFRS.
- Transition disclosures investors should expect and evaluate.
- The implication on financial statement captions.
- The implication on non-GAAP measures.
- Impact on cash.
- Impacts on ratios.
- New disclosures to be provided.
- Industries with biggest impacts.
- Market expectations.
About the Author(s)
Sandra J. Peters, CFA, is senior head of financial reporting policy and serves as spokesperson for CFA Institute to key financial reporting standard setters including the IASB, FASB, and the US Securities and Exchange Commission. She holds the Certified Public Accountant (CPA) designation.
Ms. Peters holds a BSBA in accounting from the University of Nebraska and an MBA in finance from Indiana University. She was awarded the CFA designation in 1998. Ms. Peters leads the Financial Reporting Policy team responsible for tracking all financial reporting issues, including coordinating the efforts of the Corporate Disclosure Policy Council, a key committee of CFA Institute volunteers that reviews and comments on financial reporting policy initiatives worldwide. She serves as spokesperson for CFA Institute to key financial reporting standard setters including the IASB, FASB, and the U.S. Securities and Exchange Commission, and conducts outreach to other professional organizations and the media to discuss and promote financial reporting policies.
Ms. Peters has an extensive and well-balanced background as a user advocate, preparer, and auditor. Most recently, Ms. Peters served as vice president and corporate controller at MetLife Inc., where she managed a staff of 60 individuals and was responsible for SEC Reporting, Technical Accounting, SOX Controls, and HR Controllers.
Prior to joining MetLife, she was a partner at KPMG LLP providing audit services primarily for insurance and financial services companies with an emphasis on clients in the financial guarantee, reinsurance, and property and casualty sectors of the insurance industry. While at KPMG she spent three years in London as a member of the U.S. Capital Market Group, where she assisted several European-based multinational clients with U.S. GAAP conversion projects, the SEC registration process, and technical assistance on U.S. GAAP accounting issues and SEC disclosure matters.
Ms. Peters is a CPA licensed in New York, Texas, and Nebraska and a member of the American Institute of Certified Public Accountants (AICPA) and the New York Society of Securities Analysts (NYSSA). She is also member of the AICPA's Insurance Expert Panel.
Jack T. Ciesielski, CFA, founded R.G. Associates in 1992 and started publishing The Analyst's Accounting Observer in May of that year. A graduate of Loyola University Maryland undergraduate accounting and master's finance programs, and holding both the CPA and CFA designations, he spent nearly seven years as a security analyst with the Legg Mason Value Trust in Baltimore. Prior to joining Legg Mason, he held various positions in the accounting profession as an auditor and as an educator.
Mr. Ciesielski has been a member of the Financial Accounting Standards Advisory Council of the FASB, and a member of FASB's Investors Technical Advisory Committee, which advised the FASB on the information needs of investors during its existence. He has been actively involved in standard setting as a member of the FASB's Emerging Issues Task Force and as a member of the AICPA's Accounting Standards Executive Committee (now the AICPA's Financial Reporting Executive Committee), and is currently a member of the CFA Institute Corporate Disclosure Policy Committee.
In addition to writing for The Analyst's Accounting Observer, Mr. Ciesielski is an occasional contributor to Fortune and Barron's. He has also testified before the U.S. Senate and the Securities & Exchange Commission on accounting matters on numerous occasions.