New lease standards add burden to tenants, landlords

By Yeow Chee Keong and Chen Voon Hoe

AFTER nearly five years of deliberation, the International Accounting standards Board (IASB) issued the revised leasing standard IFRS 16 in January 2016. IFRS 16 will replace the current IAS 17 for companies with annual reporting periods beginning on or after Jan 1, 2019. Before the new standard becomes effective, tenants, landlords and stakeholders should take the time to understand the implications that the new standard might have on them and for Singapore’s real estate industry.

Tenant’s perspective

Currently under IAS 17, property lease contracts are classified as either operating leases (where they are not part of assets and liabilities – commonly referred to as “off balance sheet”) or finance leases (where they are included in assets and liabilities – commonly referred to as “on balance sheet”), with the majority classified under the former.

When IFRS 16 comes into effect, almost all leases will have to be recognised as “right of use” assets with corresponding lease liabilities. This will have an impact on the tenant’s key financial metrics, including increased leverage ratios and potentially lower return on assets.

In addition, tenants will need to split the lease and non-lease (such as service charge) components in the contract and recognise only the lease components on the balance sheet. In a recent PwC study on the impact of the new lease standard on tenants across all industries and sectors, it was found that 53 per cent of entities surveyed will see an increase in their debt of over 25 per cent.

Zooming into the retail sector, the survey found that the median increase in debt for retail companies is 98 percent, effectively almost doubling their debt. In addition, the new standard’s additional requirements on disclosures, contract and data management may incur significant costs for tenants – in terms of finances and other resources. Retailers in Singapore are already facing pressures on their operating models, and this clearly is something retailers need to prepare for.

(Source: HUB, 9 April 2016)


  1. Explain how the new accounting treatment for leases under IFRS 16 would affect tenants who have entered into debt covenants with creditors. Also, explain from the perspective of the debt hypothesis of Positive Accounting Theory (PAT) what actions such tenants might take. (5 marks)
  2. Are changes to accounting standards, such as the one explained in the above article,likely to have social and economic consequences? What are the possible social and economic consequences that may result from adoption of IFRS 16 Leases?(10 marks)
  3. Should accounting standard setters consider social and economic consequences of accounting treatments when developing accounting standards? Discuss in relation to objectives and qualitative characteristics of general purpose financial reports as stated in the ConceptualFramework of the Australian Accounting Standards Board.(10 marks)

QUESTION 2                                                                                                          (20 Marks)

  1. Identify a positive theory (it can be about any area of accounting). Explain the identified theory and provide an example of a situation where the selected theory can be tested. Explain how the identified theory can be testedin the exampleyou (10 Marks)

Note: Positive Accounting Theory (PAT) is only one type of positive theory. The question relates to any positive theory in accounting.

  1. Can you prove a theory of accounting? Discuss in relation to both normative and positive theories. When formulating your answer explain the difference between positive and normative theories, providing at least one example from accounting. (10 Marks)

QUESTION 3                                                                                                          (20 Marks)

  1. Discuss, using examples in relation to assets, liabilities, income and expenses, the role professional judgement plays in measuring items in the financial statements. Based on your discussion conclude whether professional judgement allowed under the accounting standards can have a material impact on reported profits. (10 marks)
  2. Does the Australian Accounting Conceptual Framework issued by the Australian Accounting Standards Board (AASB) highlight stewardship, decision usefulness or both? You are required to explain these two terms, differentiating between the types of information relevant for each of themand provide evidence from the Conceptual Framework to highlight aspects consistent with stewardship and/or decision usefulness. (10 marks)

QUESTION 4                                                                                                          (20 Marks)

Businesses voluntarily provide a substantial amount of social and environmental information to the public. Deegan (2014, p.489) highlights that, “business entities and business associations typically make submissions to government which argue in favour of maintaining the voluntary status of social and environmental performance reporting. That is, they typically oppose the introduction of legislation to require them to report information about their social and environmental performance”.

[Reference: Deegan, C. 2014. Financial Accounting Theory, North Ryde: McGraw-Hill]

  1. Adopting a critical perspective of accounting, explain why businesses provide social and environmental information yet oppose reporting of such information to be regulated. (10 Marks)
  2. Provide arguments to support the view that companies may not provide an optimal level of social and environmental information even in the absence of regulation mandating companies to report such information. (10 Marks)


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