IFRS 16

The leases standard is changing

The IASB published IFRS Leases 16 in January 2016 with an effective date of January 2019.

 

The IASB published IFRS 16 Leases in January 2016 with an effective date of 1 January 2019.

The new standard requires lessees to recognise nearly all leases on the balance sheet which will reflect their right to use an asset for a period of time and the associated liability for payments.

Leasing is an important and widely used financing solution. It enables companies to access and use property and equipment without incurring large cash outflows at the start. It also provides flexibility and enables lessees to address the issue of obsolescence and residual value risk. In fact sometimes, leasing is the only way to obtain the use of a physical asset that is not available for purchase.

 

"The earlier you begin to understand what impact the new standard may have on your organisation the better prepared you will be to iron out potential issues and reduce implementation costs and compliance risk."

Lessees

  • The new standard will affect virtually all commonly used financial ratios and performance metrics such as gearing, currentratio, asset turnover, interest cover, EBITDA, EBIT, operating profit, net income, EPS, ROCE, ROE and operating cash flows. These changes may affect loan covenants, credit ratings and borrowing costs, and could result in other behavioural changes. These impacts may compel many organisations to reassess certain ‘lease versus buy’ decisions.
  • Balance sheets will grow, gearing ratios will increase, and capital ratios will decrease. There will also be a change to both the expense character (rent expenses replaced with depreciation and interest expense) and recognition pattern (acceleration of lease expense relative to the recognition pattern for operating leases today).
  • Entities leasing ‘big-ticket’ assets – including real estate, manufacturing equipment, aircraft, trains, ships, and technology – are expected to be greatly affected. The impact for entities with numerous small leases, such as tablets and personal computers, small items of office furniture and telephones might be less as the IASB offers an exemption for low value assets (assets with a value of $5,000 or less when new). Low value assets meeting this exemption do not have to be recognised on the balance sheet.
  • The cost to implement and continue to comply with the new leases standard could be significant for most lessees. Particularly if they do not already have an in-house lease information system.

Lessors

  • Lessees and lessors may need to consider renegotiating or restructuring existing and future leases.
  • Business and legal structures supporting leases should also be reassessed to evaluate whether these continue to be

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