In 2016, the International Accounting Standards Board (IASB) published a new accounting standard IFRS 16, Leases. The Accounting Standards Council (ASC) of Singapore, in following the IASB, announced the equivalent standard for leases, FRS 116. This will come into effect from January 2019 onwards, replacing the current FRS 17, with early adoption permitted.
This Standard is applicable to all leases, including leases of right-of-use assets in a sublease, except for those leases which are applying other standards.
The primary change that FRS 116 entails is that lessees will now use a single lessee model. Previously, under FRS 17, leases could be categorised as capital or operating leases.
FRS 116 implementation is expected to be challenging for businesses with many lease contracts. This stems mainly from the high financial obligations of implementing it, which includes establishing a consolidated database of the existing lease contracts and transactions, as well as revising prior accounting information to meet the requirements of FRS 116, where necessary.
The financial implication of implementing FRS 116 is the expected increase in leverage ratio (long term solvency) due to the increase in financial liabilities and decrease in equity. Current ratio (liquidity) would be decreased as well; current liabilities will increase, provided that the current assets remain at status quo. Meanwhile, the non-current assets amount is not reporting the exact value of assets owned by the business because leased assets are included in the lessees’ books. Businesses might consider purchasing assets rather than leasing and prioritising service contracts over leasing assets.
Nevertheless, FRS 116 assists in enhancing transparency because of the disclosure requirements in the financial statements, such as the net effect of the sale and leaseback transactions and expenses on leases of low-value assets and short-term leases.
Do you have other questions regarding the new accounting standard FRS 116 in Singapore or any concern about accounting works on leases? Talk to the accounting experts in Singapore. Contact Mighty Glory Corporate Solutions today and discuss with us your needs.
