IFRS 16 Leases - New lease accounting standard

The IASB announces new leasing standard – effective 1 January 2019.

2016-02-22

In January 2016, the International Accounting Standards Board (IASB) issued the long awaited IFRS 16 – Leases. The new standard has made significant changes to lease accounting and the Australian equivalent is expected to be issued any day now. 

IFRS 16 - Leases, which replaces IAS 17 - Leases, will be mandatory for adoption from 1 January 2019 and is expected to impact virtually all businesses. Early adoption will be permitted for companies that also apply IFRS 15 – Revenue from Contracts with Customers.

Key features of the standard

Virtually all companies that have leases will be impacted by this change. In fact, the financial impact of this new standard is expected to result in an additional US$2.8 trillion being added to the assets of listed entities globally.

The new standard requires all lessees to recognise all leases on the balance sheet, except short term (less than 12 months) or low value assets.

This will impact both assets and liabilities on the entity's balance sheet and replace rent and lease expenses, with depreciation and interest expenses.

Under IFRS 16 - Leases, companies must either restate their comparatives, or make a cumulative adjustment to opening retained earnings in the year of adopting the standard, for the historic impact of the standard.

Going forward, a lease will be accounted for as a non-current asset called a ‘right-of-use’ asset, which is depreciated in accordance with IAS16 - PPE over the lease term or the asset’s useful life. An equal financial liability is also created to be unwound over the lease term. There are also additional disclosure requirements for financial statements.

For an entity that is a lessor, rather than a lessee, there will be no change to lessor accounting from the current standard, just some additional disclosures.

What does this mean for your business?

The new standard was created to improve transparency and comparability of financial reporting while providing greater insight into a company’s funding and operations. Some of the practical implications include:

  • impact on balance sheet ratios, interest cover or EBIT / EBITDA ratios requiring covenants to be renegotiated

  • removes off-balance sheet financing options such as sale and leaseback

  • no more lease straight lining therefore can impact bottom line as pattern of expense recognition changes

  • impact on value-in-use calculations when a Cash-generating Unit's (CGU) asset base increases, could result in impairment of that CGU.

How can we help?

The practical implications for company financial reporting will be significant and implementing this new standard and developing an appropriate accounting policy is expected to be very complex and time consuming.

Why not speak to the experts?

For more information on IFSR 16 – Leases and to learn about how you can ensure your company is compliant with the new leasing standard, please contact René Muller, Assurance and Advisory Services Partner.