IFRS.org gives a concise summary of the reasoning behind the move to the new IFRS 16 standard:
“The objective of IFRS 16 is to report information that (a) faithfully represents lease transactions and (b) provides a basis for users of financial statements to assess the amount, timing and uncertainty of cash flows arising from leases. To meet that objective, a lessee should recognise assets and liabilities arising from a lease.”
In order to help our clients and peers along in this endeavour, we’ve taken the key points and summarised them here, along with the questions you need to ask yourselves in order to ensure full compliance.
It helps that we provide an IBM application that facilitates both the transition process (because we know how many businesses have not yet lined up their ducks for this reporting requirement) and the ongoing reporting requirements for IFRS 16.
What is IFRS 16, and how has it changed your reporting requirements?
Again, from IFRS.org, we give you the summary of how it changes your lease-reporting process:
“IFRS 16 introduces a single lessee accounting model and requires a lessee to recognise assets and liabilities for all leases with a term of more than 12 months, unless the underlying asset is of low value. A lessee is required to recognise a right-of-use asset representing its right to use the underlying leased asset and a lease liability representing its obligation to make lease payments.“
IFRS 16 Leases was issued by the board in January 2016, and many initiatives have been put in place to support its implementation. The onus, though, is on the businesses affected to ensure that they are IFRS 16 compliant.
What is helpful is the extensive set of videos made available by the board to support implementation, like this Q&A video, which answers some questions about the reasoning, practical implementation, and hurdles of the IFRS 16 standard.
The IFRS 16 implementation team have published their latest webcast, based on questions received by the team on Lease Term. Board Member Darrell Scott shares his thoughts on the questions.
What are most likely impacts of IFRS 16 in your business?
- Key performance indicators
IFRS 16 could have changed your financial, operational and strategic decision-making in the context of operating lease arrangements, particularly for lessees that have a significant exposure to property and large value leases.
- Loan Covenants
The addition of leases to the balance sheet will mean that many companies will experience a corresponding increase in their debt levels.
Retailers, airlines and professional service industries may already have suffered badly because of a reliance upon property or equipment leases, which previously qualified as operating leases.
Entertainment, transport, wholesale and telecommunications sectors are likely less affected, but stilll need to consider a full transition in order to keep all the bases covered.
EBITDA numbers have increased for those which are heavy users of what are currently operating leases.
- Regulatory capital requirements
Financial institutions with material off-balance sheet leases applying IFRS 16 report higher assets and lower equity, affecting their regulatory capital
Are you IFRS 16 Compliant?
If not, kickstart compliance with these 10 critical questions:
- Do you know which of the entity’s contracts are, or contain, leases?
- Are your systems and processes capturing all of the required information?
- Are systems and processes capable of monitoring leases and keeping track of the required ongoing assessments?
- Have you considered the use of IFRS 16’s recognition exemptions and practical expedients?
- Do you know which transition reliefs are available, and whether you will apply any of them?
- Do you know what discount rates you will be using for your different leases?
- Have you considered the impact of the changes on financial results and position?
- How will you communicate the impact to affected stakeholders?
- Have you planned when you will consider the tax impacts?
- Have you considered whether your leasing strategy requires revision?