IFRS 16: Leases
What you need to know
IFRS 16 - Leases is changing effective for annual periods beginning on or after 1 January 2019. Are you ready?
Leasing is an important financial solution used by many organizations. It enables companies to finance property, plant and equipment without the need to incur large initial cash outflows.
Under the existing leases standard (IAS 17), lessees account for lease transactions either as off-balance sheet operating or as on-balance sheet finance leases. The new standard requires lessees to recognise nearly all leases on the balance sheet.
Why is it an issue?
- Effects of the new standard will be felt across all industries, and it has a cross-functional impact to your entire organisation
- The new standard will gross-up your balance sheet and impact your profit and loss, and requires extensively more disclosures
- It redefines commonly used financial ratios such as gearing ratio and EBITDA, and impacts performance metrics too
- It may also affect lessors’ business models and offerings too
The accounting change for leases is just the tip of the iceberg. Changes to the lease accounting standard have a far-reaching impact on lessees’ business processes, systems and controls.
Companies will need to take a cross-functional approach to implementation, not just accounting. The new standard will have an impact on your financial ratios and it may impact your financial covenants, credit ratings, borrowing costs and your stakeholders’ perception of you.
At PwC, we can help you implement the new standard in three steps:
- Step 1: Get organised
- Step 2: Understand the impact
- Step 3: Transition to the new standard
Step 1: Get organised
Project setup, governance and resources
- Project management and planning advice
- Gap and scoping analysis
- Training
- Industry benchmarking
- Quality assurance function
Step 2: Understand the impact
Scoping, model impact and assess business implications
- Financial impact assessment
- Financial modelling
- Evaluation of options for transition
- Impact of judgements and estimates
- Operational impact
- Vendor selection support
- Assess business and tax implications
Step 3: Transition to the new standard
Implementation - gather and validate data
- Pre and post implementation review
- Review of contracts and data validation
- Control testing of new systems
- Review of disclosures
- Dry run of pro forma financial results and comparatives
Useful resources
IFRS 16 – a new era of lease accounting!
Read our expert's insights on IFRS 16
PwC's Analysing IFRS 16 Leases
This is the first of a series of videos from PwC's IFRS 16 specialists which will take a look at the requirements of the standard, including how specific industries might be impacted.
