IFRS 16 will Replace IAS 17 Leases – What are the Changes?

The introduction of IFRS 16 “Leases” will profoundly change the lease accounting rules with a potentially significant impact on the financial statements presented in accordance with IFRS. This standard is applicable from the beginning of January 2019 but early application of this standard is possible for entities adopting IFRS 15.

Let us see the changes in standard and its future impact on the financial statements, positioning us lessee side. For the lessor, the consequences are limited.

Why a new standard – IFRS 16?

IAS 17 “Leases” published in 2003 based on a fundamental distinction between finance leases and operating leases. The accounting treatment relies for finance leases on the lease of the property at the balance sheet as Liability and for operating leases by the recognition of rent expense for the period.

In recent years the contractual terms of the contracts were complied to qualify a lease as Finance or Operating lease. This situation was not satisfactory because ultimately the economic reality was not properly translated, in particular the state of financial position (balance sheet) did not reflect the economic assets used by the company or all of the commitment to pay the liability.

For example, you could find truck companies who had no truck in the balance sheet because the entire truck fleet was under leasehold and which was considered operating leases. This required us to perform non-accounting adjustments to integrate leases in the analysis of solvency and profitability ratios.

What are changes in IFRS 16?

The objective is to improve transparency and comparability of financial statements by adopting a single treatment which leads to sign the balance sheet of the lessee.  All leases. Consequently :

Balance sheet
Right to use the underlying asset (amortized over the period of use)A financial liability under the commitment (repaid by rent payments)
Income statement
Amortization of right of use Financial costs
= Decreasing rental expenses

As a simplification option, companies can continue to register expense for contracts of low value or less than 12 months.
What is the impact on the financial statements?

First a change in key financial indicators. EBITDA and operating income will be improved to the extent that the rent currently shown as operating expenses under IAS 17  will be considered a debt repayment with share capital and interest under IFRS 16. The breakdown of the rental charge will be non-linear to a contract in the income statement as financial expenses will be decreasing.

Next, a modified balance sheet with an increase in assets and liabilities, we especially highlighted an increase in net indebtedness/liabilities, payment commitments for leases previously as off-balance sheet debt which now will include the balance sheet.Also, increased volatility in the balance sheet due to the obligation to review the estimates at each closing.

Finally, a change in presentation in the cash flow. The disbursement of the rent will be considered a stream of funding for capital and the interests will be included more often in operating cash flows. Under IAS 17, the full rent was disbursed in operating cash flows.

Like, we see the impact of IFRS 16 are significant to the financial statements. Companies need to prepare firstly identifying now all leases, including those included in service contracts on the other hand, considering the impact on the financial statements and indicators used by the company. Finally, there is also to set up monitoring modalities and registration of leases.

It remains now to assess whether the new standard will not lead companies to change their asset financing practices. It is not impossible that the rental forms are abandoned in favor of the acquisition.

Show More

Related Articles

Back to top button

Adblock Detected

Please consider supporting us by disabling your ad blocker