IFRS 16 leasing compliance: implications for business

ifrs 16 leasing compliance
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IFRS 16, the new International Financial Reporting Standard which came into effect in January 2019, has a range of implications for companies relying on leasing.

With multiple sectors of industry – including telecoms, retail, logistics and property – dependent on leasing, the global leasing industry has seen annual growth of around 16 per cent year-on-year. IFRS 16 leasing compliance removes the definitive distinction between financial and operating leases, meaning businesses which had previously classified leases as operating leases in order to avoid liability must now record all leases as liabilities.

Casper van Leeuwen, of the European consultancy Satriun Group, said: “IFRS 16 was introduced to enable a level playing field between companies that would mostly acquire assets (on balance) and companies that would mostly lease assets (off balance). The gearing of those companies was not sufficiently comparable in their respective IFRS financial statements. Also, the previous lease standard would open the door to financial engineering and the cosmetical [sic] presentation of gearing.”

Short term leases – with maximum terms of no more than 12 months – and leases on low value assets – valued at $5,000 (€4,448.69) or less when new – are exempt from IFRS 16 leasing compliance, with multiple short term or low value leases permitted to be reported as expenses; however, unless a company’s portfolio consists of near-identical leases, each exempt lease must be considered on a case-by-case basis.

Although IFRS 16 was first published in January 2016, studies of affected companies have shown very few firms have conducted the necessary preparation to enact compliance by the time the standard came into force this year. By December 2018, only six per cent of publicly traded companies said they were “fully prepared” for the new regulations.

Crowe UK’s Matthew Stallabrass said: “Organisations need to start engaging with this standard if they have not already done so. Firstly, they will need to identify all the leases they have entered into. They will then need to consider what exemptions they will take and their approach to transition, to ensure they have an understanding of the lease terms and have a consistent approach to making any judgements that they need to under the standard, for example over the lease term or the appropriate discount rate to use.”

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