Aiming to bring more transparency to leases in companies’ financial statements, the new standard will not only impact finance and accounting but will also result in major changes in data processing and related processes.
Lessors
Lessors are likely to be least affected by the changes. IFRS 16 Leases is very similar toIAS 17 Leases, introducing changes for subleases, lease modifications and disclosures only.
Lessees
Lessees, on the other hand, are likely to be the most affected, especially those that currently finance significant parts of their activities through operating leases. Accounting for contracts such as operating leases will no longer be applicable, except for short-term leases (terms of 12 months or less) and low-value asset leases. All other leases within the scope of IFRS 16 are required to be brought on-balance sheet by the lessees recognizing the ‘right-of-use’ of the asset and the related lease liability at commencement of the lease. Subsequent accounting will generally be similar to the finance lease model under IAS 17.
Financial impact for lessees
With respect to the financial impact, the new standard will firstly affect the balance sheet; it will lead to an increase in assets that are capitalized as well as in loans that are booked as liabilities. Secondly, it will affect the income statement, as lease expenses will be replaced by higher depreciation charges and an interest expense.
Financial position
Operating leases currently kept off-balance sheet should now be disclosed on the balance sheet thereby increasing total assets and liabilities.
Financial performance
Rent expenses relating to the operating lease should be split into depreciation and interest payments. It will decrease operating expenses and respectively increase EBITDA of the lessee.
Key challenges for lessees
Entities will face the following challenges in implementing the new standard:
Comparatives – Option 1
Retrospective: Comparatives are re-calculated under the assumption that IFRS 16 has always been applied since the first day of the operating lease.
Comparatives – Option 2
Cumulative catch-up: Comparatives are presented as previously reported under IAS 17 with the difference in assets to liabilities recognised in operating retained earnings.
Timeline and comparative balance options for IFRS 16 |
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