Question

Very briefly describe the major change being implemented to operating and capital leases as they previously existed and how that will make comparative analysis difficult for a period of time.

Answer 1

Accounting for or operating and capital leases have changed since introduction of IFRS 16 and it will replace the international accounting standard 17 which is related to lease and related interpretation.

IFRS 16 change the accounting sustainability lessees. The new standard will not be recording lessees classification as either operating lease and finance lease instead it will classify all the lease as capitalised lease by recognising lease liability and right of use in the balance sheet.

it will affect a lot of listed companies who have a lot of future payments due and which were not recognise on the balance sheet applying the previous accounting requirements so with the introduction of IFRS 16, the need to recognise those lease will arise and hence the books of account will also look different for those companies.

IFRS16 will always increase the visibility of the companies lease commitment and it will also better reflect economic reality. This new standard will make it easier for users of financial statement to compare companies that leaves their Assets with companies that borrow money to buy the asset.

So on the comparative front, there would not be two companies which will either companies that borrow money with the same company that borrow money or or other company who will buy their asset from borrowing. And with the elimination of recognition of financial and operating leases separately, now it is different as the classifications are also not present so, there will be difficulty in comparison.