IFRS 16 Start early and avoid costly mistakes

IFRS 16 Start early and avoid costly mistakes

IFRS 16 leases will be effective from 1 January 2019. The new standard will replace IAS 17. The deadline may seem far away, but because the implementation of IFRS 16 will have a significant impact on quite a range of companies, we advise to prepare early. Therefore it is important to put IFRS 16 already high on the agenda.

Current situation

In the current situation (under IAS 17), there is a distinction between financial leases and operational leases. Financial leases are liabilities that are shown on the balance sheet of a company. Operational leases are off-balance sheet liabilities (i.e. liabilities that are not shown on the balance sheet of a company). That means that operational leases can cause a relatively small liabilities position on the balance sheet, while financial leases lead to a larger liabilities position on the balance sheet. The two kinds of leases not only impact the balance sheet differently, the P&L of a company is also impacted in a different manner. Financial leases have an impact on the P&L through both the depreciation line (of the leased assets) and the finance costs line. On the other hand, operational leases are expensed in the P&L, this is mostly done on the operating costs lines.

What is going to change?

When IFRS 16 is effective, there is not a distinction between financial leases and operational leases anymore. Only on-balance sheet leases are a possibility (with two small exceptions). The idea behind IFRS 16, is that it should lead to a better representation of the assets and liabilities position of a company. Furthermore, it should enhance the comparability of companies and industries.

Who will be impacted?

Lessees with a significant portion of operational leases will be impacted the most. Lessors, however, will not be significantly impacted by IFRS 16. According to a study of the International Financial Reporting Standard, the industries that will be impacted the most are

  1. Airlines,
  2. Transport,
  3. Retailers and
  4. Travel & Leisure.

Companies in these four sectors have the highest (estimated) ratio of future operational lease payments to total assets.

Zanders can help

Would you like to discuss the impact of IFRS 16, or would you like to get more information on the impact that IFRS has on your debt covenants? Please contact Sjoerd van Zoelen.