Lease definition

In many cases, assessing whether a transaction is a lease will be straightforward, and a transaction that is a lease today will be a lease under the new standard. A key focus will be completing and documenting the assessment.

In other cases, the assessment will be more complex and there may be changes in which transactions are identified as leases – e.g. power purchase, IT outsourcing and transport agreements.

Deciding whether to grandfather the lease definition

As companies prepare to adopt the new standard, a key decision will be whether to apply the practical expedient to grandfather the lease definition for existing contracts on transition. This is a balancing act.

Although this practical expedient offers considerable relief, it may result in continued lease accounting for contracts that are not leases under IFRS 16. In addition, it may impact comparability in the years after transition.

You need to weigh potential cost savings against reduced comparability.

Identifying all lease agreements and extracting all key data

The effort required to identify all lease agreements and extract all relevant data may be substantial. Even if the simplified model is applied for short-term and low-value item leases, each lease will still need to be identified and its key terms extracted.

The task ahead should not be underestimated.

Find out more

Our Lease Definition (PDF 657 KB) publication provides a detailed analysis of the key elements of the lease definition and the related transition provisions, together with KPMG’s comprehensive insight and examples illustrating practical application of the new requirements.

Visit our Leases hot topics page for more insight on lease accounting under IFRS.