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1 At a glance | 3
1.2 Key impacts
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1.2 Key impacts
Distinguishing lease income from other revenue. For lessors, identifying
components and allocating consideration will determine the split of lease income
vs revenue from contracts with customers. These amounts are often presented,
and must be disclosed, separately. For example, a real estate company will need
to distinguish lease income from revenue for other building-related services – e.g.
common area maintenance (CAM).
Determining what proportion of a contract will be on-balance sheet. For
lessees, distinguishing between lease components (generally on-balance sheet)
and non-lease components (generally off-balance sheet) will be a key driver of the
impact of the new standard. This will also require careful allocation of consideration
between components.
Deciding whether to apply the practical expedient. Lessees will need to decide
whether, and if so when, to apply the practical expedient to combine a lease
component with associated non-lease components. This decision must be made
separately for each class of underlying asset. Applying the practical expedient will
generally simplify application of the new standard – but when payments are fixed,
this will increase reported assets and liabilities, and impact many financial ratios.
Identifying components and gathering information. This may require a
substantial effort to identify all components, gather information on the stand-alone
prices and allocate the consideration on commencement, reassessment and
modification of the lease.
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 remeasure it –
e.g. remeasurement of the lease components on a reassessment or modification.
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 reassessment and lease modifications. This may impact a
company’s ability to accurately predict and forecast results and will require
ongoing monitoring.
Changes in contract terms and business practices. The impact of the new
standard is not limited only to financial reporting. It may prompt changes to
certain contract terms and business practices – e.g. changes in the structuring or
pricing of a lease agreement, including the type of variability of lease payments
and the inclusion of options in the contract. The new standard is 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 that enable them to identify separate lease and non-lease components
and gather information for allocating consideration to comply with the requirements.
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 position and 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 remeasurement when a reassessment or modification occurs, will need to
be documented.