Lease accounting standards enhance transparency by requiring organisations to report lease assets and liabilities on their balance sheets. This helps stakeholders gain a clearer understanding of a company’s financial position and its obligations under leasing arrangements.
With lease assets and liabilities on the balance sheet, lease accounting standards promote consistency and comparability among organisations.
More accurate reflection of financial performance
Lease accounting with IFRS 16 eliminates the distinction between operating leases and finance leases, requiring both types of leases to be recognised on the balance sheet. This change provides a more accurate representation of an organisation’s assets, liabilities, and expenses over the lease term, leading to improved financial reporting.
By providing a comprehensive view of an organisation’s lease obligations, lease accounting standards enable stakeholders to make more informed decisions. Investors, creditors, and other users of financial statements can evaluate the impact of lease arrangements on an entity’s financial health, cash flows, and risk profile.
Prevent off-balance sheet financing
By requiring the recognition of lease assets and liabilities, the standards aim to ensure that all significant lease obligations are reported, eliminating the potential for companies to obscure their financial obligations through leasing arrangements.