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MSSF/IFRS 16 – several words regarding the new standard (part 1)

Piotr STASZKIEWICZ
Audit Partner at RSM Poland

For several months now, we have been noticing an increased activity among entities in the area of inquiries regarding the issue of leasing, as well as the analysis of contracts they signed for the use of certain assets – be it in the form of a lease, rental or tenancy. The emerging questions have hastened the decision to write several entries about the new IFRS 16 standard.

In this article, we would like to draw your attention, firstly, to the fact that the new standard will not only apply to those entities that have signed lease contracts (whether operational or financial), but also other civil law contracts - e.g. rental or tenancy etc. Each time a contract that transfers rights to an asset (or a substantial part thereof) for a certain period of time in exchange for a fee should be considered. Thus, the name (title) of the concluded contract itself should not be relied on.

In practice, contracts are often referred to as a tenancy, rental or operational lease agreements were, by definition, treated as those which, under the balance sheet law, did not meet the definition of a finance lease. The superseded standard No. 17 (IAS 17) indicated certain criteria that had to be met in order for an asset to be shown in the lessee's balance sheet.

Currently, IFRS 16 significantly changes the concept of considering contracts in terms of the need to disclose transactions in the lessee's balance sheet. As a rule, most of the concluded contracts transfer the right to an asset in exchange for a fee to the beneficiary, so the majority of the lessees/tenants will be obliged to present the right to an asset they benefit from in their balance sheets. And we are not talking here strictly about assets, but about the right to benefit from that asset, and that right must be properly priced.

Our clients ask many questions: will there be exemptions from the application of IFRS 16 as before? How should assets (and rights thereto) be valued according to the new rules? How should they be presented in the balance sheet? And what if the value of the assets is not shown in the lease/tenancy agreement? And what if the contract has been concluded for a period of one year?

We will try to address each of these queries in subsequent entries regarding leasing according to the new IFRS 16. However, should you wish to learn more today, please contact us.

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