After implementing IFRS 9 Financial Instruments and IFRS 15 Revenue from Contracts in 2018, you may be mopping your brow with relief! Don’t celebrate too soon though, as there’s still IFRS 16 Leases to go, and for many entities this will entail the most work, both on transition, and on an ongoing basis.
IFRS 16 replaces the current leasing standard IAS 17, and becomes effective for entities reporting on 31 December 2019 or later. Most people are aware that it results in operating leases coming onto the balance sheet for the first time, however from the sessions I have trained over the past couple of years, there are a lot of mis-conceptions. Let’s explore some of these:
“It’s the same as finance lease accounting” – not quite. Even the accounting for finance leases changes under the new standard. The definition of lease term and the relevant payments to include in the NPV calculation are both different. There is more estimation involved, which of course means revising these estimates each year as new information is obtained.
“I’m going to take the short-term lease exemption and keep my operating leases off the balance sheet” – tricky. The definition of short term is where the lease term is 12 months or less. However, the lease term definition is the non-cancellable period plus periods covered by options to extend the lease if the lessee is reasonably certain to exercise that option. Hence the exemption is only available if there is no economic incentive for you to extend the short-term lease.
“If I take the cumulative catch-up approach, I only have to apply IFRS 16 to leases starting after the date of initial application” – wrong. The cumulative catch-up approach means that the comparative year does not need restating, however an adjustment is still required on the date of initial application to bring your operating leases onto the balance sheet.
“I’m a lessor, so I’m unaffected by IFRS 16”. Although the accounting entries are unaffected, there may still be some changes in the numbers due to the more involved definition of lease terms and relevant lease payments.
Your auditors will require evidence that each lease contract has been reviewed to check it is IFRS 16 compliant. For entities with multiple operating leases, how will you ensure that all operating leases are captured? Do you have all the leases filed somewhere? Are they in English? How easy will it be to identify the key terms? Is your operating lease commitments note accurate enough to use as a starting point?
Have you spoken to your lenders to discuss the fact that your covenants will be affected? Has your HR team considered the impact of changes to KPIs on your employee reward schemes?
How are you going to capture and record changes in estimates each year? For example, where lease payments are linked to RPI, the lease liability (and therefore right of use asset) will require remeasuring each time payments are revised.
Going forward should you just buy rather than lease?
To obtain a detailed understanding of IFRS 16, to practice the calculations, understand the exemptions and discuss the practicalities, join me for the half day workshop on Wednesday 9th January 2019.
For more information on our IFRS 16 course or to book your place visit: https://buff.ly/2ArbFTY.