Interpretation of the concept of liabilities in lease accounting

Abstract

The reform of lease accounting for lessees has brought about a major change that has required the interpretation of the concept of assets and liabilities. The lease project arose from a lack of information about the entity’s liabilities, as some users believed that operating lease commitments should be reported as liabilities of the entity. Concepts are fundamental in a principles-based standard. IFRS 16 was a controversial standard and subject to strong pressure, especially from preparers, and not only conceptual positions were involved in the deliberation process. As a principles-based standard should be interpreted following those principles, this paper examines the interpretative decisions following the adoption of IFRS 16 to analyze whether they are consistent with the concepts used in the standard, particularly the concept of liabilities. Our results show that the standard and the basis for its conclusions have needed clarification or, in some cases, were interpreted inconsistently with the criteria under which IFRS 16 was issued. We argue that these departures have occurred because the Basis for Conclusions of IFRS 16 does not clearly reflect the concept of liabilities and they suggest that an explicit interpretation of the concepts is needed, either in the standard or in the doctrinal literature; otherwise, the standard may abandon its vocation of principlesbased regulation. Our findings are relevant to standard setters, particularly for the IASB when addressing the post-implementation review of IFRS 16, and preparers and auditors who must apply the standard.