IFRS 16

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The IASB issued the new Leases standard on 13 January 2016, with effect from 1 January 2019.

Leasing arrangements provide an important financing solution for many organisations. They enable companies to use non-current assets without incurring a significant initial outflow of cash. Under the current leases standard, lessees may account for such arrangements as off balance sheet items (in the case of operating leases), or as balance sheet items (in the case of finance leases). IFRS 16 requires lessees to recognise on the balance sheet almost all lease agreements that reflects the lessee’s right to use the asset over a certain period of time, as well as any commitments to pay related rent. For lessors, the accounting treatment remains largely unchanged.

Practical implications

The new Leases standard will affect almost all organisations as practically all organisations are involved in leasing arrangements. Applying the new standard is expected to result in a gross up of the balance sheet, and possibly change the timing of when rent and other lease related expenses must be accounted for and where in the profit and loss statement they must be presented. The new standard will affect almost all performance indicators used in practice, such as the gearing ratio, liquidity ratio, interest coverage ratio, EBITDA, operating profit/loss, net profit/loss, EPS, ROCE, ROE and the operating cash flow.

The impacts of the new standard are also expected to have an impact on an organisations strategy and decisions concerning the acquisition of assets (because a company’s decision to lease rather than buy an asset must be assessed according to new criteria). It is important to note that the accounting and financial impacts are just the tip of the iceberg – the new standard is expected to have a comprehensive effect on companies’ processes, and therefore impacts on an organisation’s IT, procurement, tax, treasury, legal, HR and operations functions in addition to the accounting impacts.