MASB issues new Standard which requires lessees to recognise all leases on balance sheet
On 15 April 2016, the Malaysian Accounting Standards Board (Board) has issued MFRS 16 Leases to replace the existing Standard on Leases, MFRS 117. MFRS 16 is word-for-word IFRS 16 Leases as issued by the International Accounting Standards Board, and has the same effective date of 1 January 2019. Earlier application is permitted provided MFRS 15 Revenue from Contracts with Customers is also applied.
Currently under MFRS 117, leases are classified either as finance leases or operating leases. A lessee recognises on its balance sheet assets and liabilities arising from the former but not the latter. As a result, many users have resorted to adjust the lessees’ financial statements for the effects of operating leases commitments to enable comparison with entities that borrow to buy assets.
MFRS 16 eliminates the distinction between finance and operating leases for lessees. All leases will be brought onto its balance sheet as recording certain leases as off-balance sheet leases will no longer be allowed except for some limited practical exemptions. In other words, for a lessee that has material operating leases, the assets and liabilities reported on its balance sheet are expected to increase substantially.
MFRS 16 does not apply to short-term leases of 12 months or less and leases of low-value assets, for example, leases of office furniture and personal computers. A company using these exemptions treats such leases as off balance sheet leases. Moreover, MFRS 16 provides substantive transition relief, one of which is that a lessee is not required to reassess existing lease contracts.
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