IFRS 16 is the latest International Financial Reporting Standard designed for lease accounting. It came to effect on 1st January 2019 to replace the IAS 17 accounting standard. International Accounting Standards Board is the organization behind IFRS 16.
At first look, IFRS 16 seems like a complex accounting legislation, which may be challenging to navigate, but analyzing it keenly, however, its relatively easy to understand, but may be not so much to implement. This guide tries to make it easy for readers to understands the benefits, setbacks, and the impact of IFRS 16 to business accounting.
What is IFRS16?
IFRS 16 came to effect from 1st January 2019. Earlier applications were allowed if IFRS 15 was also applied. The goal of IFRS 16 is to report information that represents:
- Lease transactions.
- Provide a framework through which financial statements users can evaluate the amount, uncertainty, and timing of cash flows based on leases.
To accomplish that objective, lessees must identify assets and liabilities coming from a lease.
IFRS 16 includes a single lessee accounting prototype which requires assets and liabilities to be recognized by the lessee, for leasers with a validity of 12 months, unless the asset in question has low value. A lessee should also acknowledge a right-of-use asset to leverage the underlying leased asset as well as a lease liability recognizing its commitment to make lease payments.
Is IFRS Certification Important in 2021?
As aforementioned, IFRS 16 is a global accounting framework that stipulates how firms prepare and unveil their financial statements. The certification is important as it can help professionals comprehend and explain the architecture of the model of international accounting, as well as how to implement relevant financial reporting standards to primary components of financial reports.
And discover and implement disclosure requirements for firms in financial notes and reports. It also guides professionals to prepare group financial statements such as joint ventures, associates, and subsidiaries.
What is New In IFRS 16?
The new changes in IFRS 16 apply to accounting procedures for lease agreements. Before, these were categorized into operating leases and finance leases. Technically, operating leases were excluded from balance sheets but were reported through profit and loss accounts.
The most significant change now is that the majority of leases items must be reported as assets in the company books, according to the latest “right-of-use” model which states that, “A contract is or includes, a lease provided it communicates the right to control the use of an asset for a given period in exchange for consideration. Moreover, the lease payments made on the agreement must be recorded as a lease liability on the balance sheet.
The new standard can further complicate account since the costs for cleaning, maintenance and so forth, should be split from the main lease payments, if they are in them, then they should be reported individually. In addition, the depreciation of the interest on the lease liability and asset should be reported on the profit and loss accounts.
One notable advantage of IFRS 16 is that, if your firm conducts several lease agreements, you can combine all of them into a single portfolio rather than having to report them separately. However, this is only possible if there is prove that there is no financial benefit for the company in doing this. It is also worth to note that lessor accounting is mildly affected by the introduction of IFRS 16.
The lessee is not required to recognize assets and liabilities for:
- Leases of low value assets.
- Short term leases of less than 12 months.
Who Will Be Impacted by These New Changes?
Off balance sheet lease financing numbers are extensive. Companies that leverage IFRS disclose nearly AED 11.2 trillionof off-balance sheet lease obligations. Approximately, half of listed firms leveraging IFRS, amount recognized may be affected by the new IFRS 16 changes. Still, some firms will be severely affected.
However, a lot of unlisted firms are may not be impacted directly by IFRS 16on the following grounds:
- The IFRS for small to medium firms has not been altered on IFRS 16.
- Only a few SMEs are required to implement full IFRS
Will IFRS 16 Impact Debt Agreements and Cost Borrowing?
A firm’s economic position or obligation to pay cash is not affected by change of lease accounting, whatsoever. Because these are often considered by lenders.
According to IASB, any alteration to the cost borrowing following the application of IFRS will be as a result of streamlined decision making, which will be as a result of enhanced transparency concerning the firm’s financial leverage.
Even though the terms and conditions of later debt covenants may be altered, it is expected that the changes will be handled in a way that differentiates true economic changes from accounting adjustments.