IFRS 16 and Ship Lease Accounting
The lessee right-of-use model, the retained lessor classification, and what the standard changed for a shipping company that charters in most of its tonnage.
IFRS 16 Leases is the International Accounting Standards Board standard that governs how a lessee and a lessor account for a lease, including a ship chartered in under a bareboat charter party or a long time charter. It was issued in January 2016 and applies to annual reporting periods beginning on or after 1 January 2019, replacing IAS 17.
Its central change is on the lessee side. A lessee recognises a right-of-use asset and a corresponding lease liability for essentially every lease longer than twelve months, which ended the off-balance-sheet treatment of operating leases and moved substantial chartered-in tonnage onto shipping company balance sheets. Lessor accounting substantially retained the finance and operating lease distinction inherited from IAS 17, so a lessor’s treatment still depends on which category the lease falls into.
The full article will cover the recognition and measurement mechanics, the short-term and low-value exemptions, how a charter is assessed for whether it contains a lease at all, the treatment of purchase options and variable payments, the sale-and-leaseback provisions, and the effect on gearing covenants in ship-finance documents.