Shipping lessees need to be up to speed with new IFRS 16

The new lease accounting standard, IFRS (International Financial Reporting Standards) 16 Leases, comes into effect for periods beginning on or after January 1st 2019, accountancy and consulting firm Moore Stephens has reported.

IFRS 16 will have most impact on lessees, for whom it removes the distinction between an operating lease and a finance lease. All lease arrangements will be brought onto the balance sheet. For all arrangements that meet the definition of a lease, other than those for a year or less, the lessee must determine and account for the lease liability and the related right of use asset.

Moore Stephens said that the concept of control was key. “If a lessee can determine, for example, the route a vessel takes, whose cargo is carried, what cargo is carried and what speed the vessel may sail at, there will be control.” This could still be the case when there were some restrictions designed to protect the owner’s interests, such as prohibitions on passing through areas known for piracy.

If a contract has multiple components, such as a time charter rather than a bareboat charter, Moore Stephens said that the lessee might choose to separate the different components and account for each accordingly, but this would only be possible where the components were not highly dependent and the underlying asset could be used on its own, or with readily available resources.

IFRS 16 has less impact on lessors, for whom the distinction between finance and operating leases remains, with classification continuing to be set by whether the arrangement ‘transfers substantially all the risks and rewards incidental to ownership of the underlying asset’. The associated accounting will also remain largely unchanged.

Factsheet, IFRS 16 – An introduction for shipping, is at: