You are an assistant to the CFO of Organic Markets. Organic Markets is a fast gr

Question

You are an assistant to the CFO of Organic Markets. Organic Markets is a fast growing national supermarket chain, and is evaluating growth opportunities overseas. The CFO is looking at a natural food grocery chain in France as a potential acquisition target. Both Organic Markets and the French grocery chain lease most of their store space under operating leases. A major shareholder of your company asked your boss whether accounting for operating leases under IFRS is similar to U.S. GAAP. Furthermore, the shareholder asked whether the recently issued new lease accounting standards will have a significant impact on the financial statements of the French company and Organic Markets. Your boss told the major shareholder that he would get back to him in a day or two, as he has not paid much attention to the lease accounting development.

Your boss asked you to do some research and prepare a memo for him. The memo should discuss briefly:

1. how the IASB’s new standard will impact the French grocery chain’s financial statements

Please discuss in depth.

Explanation / Answer

Below listed are major changes per the new AS issued by IASB:

The new IASB standard on leases (IFRS 16) requires all leases to be recognized on the balance sheet unless the amount is lesser than $5,000 or for a period of 12 months or less. The lessee is required to recognize the right to use the leased item as an asset and report the present value of future lease payments as a liability.

The right to use the leased item is measured similar to non-financial assets, liability will be measured similar to any other financial liability.

In the P&L - The lessee recognizes depreciation on the asset as well as interest paid/payable on liability.

In the statements of cash flows: payment towards principal is shown under financing activities, interest is presented within operating or financing activities.

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