The impact IFRS 16 will have on businesses, from an accounting and operational perspective

IFRS16 is set to bring about significant changes in accounting for leases. This is the second article in a four-part series, which examines the new standard and its impact on business. Readers should not act on the contents of the articles in isolation, but should read all four articles together.

In January 2016, the International Accounting Standards Board (‘IASB’) issued IFRS 16: Leases which will replace the IAS 17 standard and its associated accounting requirements. In essence, IAS 17 differentiated between finance leases and operating leases and this distinction is no longer considered relevant or useful, as explained in the first article in this series.

Let’s start with the easy one, namely the impact for Lessor accounting:

For lessors, accounting under the new standard is substantially unchanged from today’s accounting in IAS 17.

Lessee accounting is slightly more challenging:

The comparison between IAS 17 operating leases and IFRS 16 is shown in the table below:

As can be seen from the above comparison, the new lease standard will have a significant impact on companies that work to a large extent with operating leases. Financial indicators of these companies will be substantially changed, because new assets and liabilities will need to be presented on the balance sheet.

From an operational perspective, companies will have to implement policies, processes and financial systems to accommodate the changes. Matters that would need consideration include (note that the list below is not exhaustive):

• The classification of each agreement to determine if the contract contains a lease;
• The determination of whether the contract contains a non-lease element;
• Consideration of how to value the non-lease element;
• Consideration of whether or not the company’s current financial systems cater for these requirements.

Lessees are encouraged to review their existing contracts as soon as possible to enable them to present comparatives.

There are several exceptions to the application of IFRS 16, and these will be examined in the next article in this series.

Articles in this series will examine:

1. Changes in off balance sheet lease reporting;
2. The impact IFRS 16 will have on businesses, from an accounting and operational perspective;
3. The exceptions to the application of IFRS 16; and
4. Whether, in light of IFRS 16, there is still benefit in leasing, as opposed to buying assets.