The IASB published a new lease accounting standard (IFRS 16), which is applicable for financial periods beginning on or after 1 January 2019. As most companies use some form of leasing they will be affected by this standard. Most operating leases, previously off balance sheet, will have to be brought on to your balance sheet going forward. Hence, there will be a gross up of the balance sheet which might affect your company’s financial ratios. This might impact loan covenants, borrowing costs and/or credit ratings.
IFRS 16 is not a simple standard and a lot of planning and foresight is required to implement a solution in the most cost-effective manner.
IFRS 16 has made material changes to lessee accounting. All lessees are impacted. If you have more than a handful of leases you will need a long term software solution to address your needs.
- Check your existing agreements to see if they are now in scope of IFRS 16. This means you need to review your agreements for leases, sub-leases, sale and lease back transactions, easements, license, sub-license and other contracts.
- For the leases you have identified you need to determine whether there are any services within the lease that need to be separated from the lease and accounted for differently.
- To identify the lease term, judgement will be required. This was not previously the case.
When identifying whether a contract contains a lease, there are three main questions to ask;
- Is there an identified asset that the customer has the right to use?
- Does the lessee obtain substantially all the economic benefits?
- Does the lessee have the right to direct use of the asset?
If the answer to all the above questions is yes, then the contract you’re dealing with contains a lease and needs to be accounted for under IFRS 16.
There are scenarios where a lessee may elect to not apply the requirements in IFRS 16. This is available for short-term leases and leases of low-value assets.
- Short-term leases
A short-term lease is defined as a “lease that, at the commencement date, has a lease term of 12 months or less”. However, a lease that contains a purchase option cannot be classified as a short-term lease under IFRS 16.
- Low-value asset leases
IFRS 16 does not provide a specific value or definition of low-value assets within the standard. Based on discussions around the IFRS 16 exemptions in 2015, the IASB indicated that low-value assets are assets with a value (when new) in the vicinity of US$5,000 or less.
When it comes to transitioning from IAS 17 to IFRS 16 there are different methods available. A lot of judgement is required here.
1. Full Retrospective
Under this approach, you will determine the cumulative effect of applying the new standard as of the beginning of the first historical period presented. Revenue and expenses are restated for all prior periods presented in the year of adoption.
2. Modified Restrospective
Under this approach the standard is applied to all new contracts which are initiated after the effective date of the new standard. For existing contracts, the measurement differences are recorded against retained earnings. Comparatives are not restated. There are many different transition options available for those who elect to use the modified retrospective approach.
Nomos One provides a summary of the different options available to clients to assist with the decisions that are required to be made on transition. Check your lease management software can do the following:
You can rest easy in the knowledge that Nomos One can do all the above and more.
While the standard change doesn’t have any reporting implications for you, consider the change in need and expectations of lessees. Lessees might now be looking for shorter term leases. This might not be so relevant for property assets, but it would certainly be relevant for assets of lower value (e.g. vehicles).