The rules for lease accounting will change per January 2019, for all companies reporting according to the IFRS standards. The IFRS standard for leasing is IFRS16.
What is IFRS16 and what could be the impact for your company?
The new financial reporting standard for leasing will significantly impact many corporates’ reported earnings, assets and liabilities, and will change the classification of expenses and cash flows, such that reported results, and the associated impact on covenant tests, may well vary materially.
Whilst IFRS16 is only applicable to periods from 1 January 2019, lenders and their corporate borrowers should start evaluating the potential impact of this now, to avoid surprises when the standard is implemented. It may have a bearing on current negotiations regarding future covenants, cash sweep mechanisms, management incentive structures and the like.
IFRS in 30 seconds!
Important changes are:
- A liability, equivalent to the lease rental amount, will appear on the balance sheet with a corresponding right of use asset
- The asset will be depreciated on a straight-line basis over the term of the individual lease contract
- The interest will be charged to the P&L on a reducing balance basis
- The accounting benefits of sale and leaseback transactions could differ in this new situation
5 important questions
- What impact will the implementation of IFRS 16 have?
- Who is affected?
- What are the options available to mitigate the potential impact?
- Is the use of IT-tools beneficial for the implementation efforts?
- What are the next steps?