Mon, Apr 10, 2017
IFRS 16 Leases, published by the International Accounting Standard Board (IASB) in January 2016, has introduced new requirements that organizations with leased assets must pay attention to. The requirements set out principles for the recognition, measurement, presentation and disclosure of all leases and will take effect in January 2019. Earlier application is permitted.
Impact
Previously, only finance leases were recorded on the balance sheet; going forward operating leases must be recorded as well. For some companies, such as retailers, airlines, transportation, and energy, this could potentially become the one of the most material items on the balance sheet.
IFRS 16 will cause significant changes to balance sheets, profit & loss (P&L), and cash flow statements in certain industries, as well as EBITDA and credit ratios, and consequently may affect market sentiment, share prices, analyst coverage, and credit ratings.
Companies should already be evaluating impact of transition options and practical expedients. Companies should also consider communication to the market as early as possible, especially if there are likely to be surprises or unexpected results. There will be a greater scrutiny of lease contracts which will systematically hit the face of the balance sheets, rather than just being recorded in the notes (off-balance sheet) of the financial statements.
Measurement by Lessees:
IFRS 16 allows two ways to determine discount rates:
Rate implicit in the lease (this may be difficult to obtain historically for all lease contracts)
Incremental borrowing rate for each lease, if implicit rate cannot be readily determined
Factors that must be considered when estimating the lease liability:
Economic environment
Company’s credit standing (or rating)
Nature and quality of collateral provided
Country risk
Other Notes
Companies with material off-balance sheet leases should analyze measurement options early to assess the potential liability and minimize the impact of adopting the new standard
Consider aggregating similar leases based on economic and other characteristics, as allowed by the standard (for instance, leases in similar geographies and vintages)
Transition:
IFRS 16 allows some practical expedients when applying the standard for the first time. In addition, upon transition a lessee has the option to apply one of the following:
Full retrospective approach: |
Cumulative catch-up approach: |
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Timing
IFRS 16 is effective for annual reporting periods beginning on or after 1 January 2019, with early adoption permitted. For those entities with significant operating leases, the impact will be significant and it becomes crucial to start preparing for adoption as soon as possible.
2018: Companies to prepare comparatives from January 2018 (only if electing to apply the Full Retrospective Approach)
Act now to:
Consider the options on measurement upon transition
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