IFRS 16: The new leases standard

STAFF REPORTER - The new leases standard features a single lease accounting model for lessees, with a host of different transition options and practical expedients.The new standard takes effect in January 2019 – the time to act is now. Before the effective date, companies will need to gather significant additional data about their leases, and make new estimates and calculations that will need to be updated periodically.The biggest impact of IFRS 16 will be on lessees as the standard requires lessees to bring most leases onto the balance sheet. The lease liability is measured at the present value of the lease payments.The key question to ask yourself is: Which lease payments should be included in the lease liability, initially and subsequently? The answer to this question will determine the scale of the impact of the new standard for lessees. The impact is less dramatic for lessors, but could involve some sensitive disclosures.The impacts are not limited to the balance sheet. There are also changes in accounting over the life of the lease. In particular, companies will now recognise a front-loaded pattern of expense for most leases, even when they pay constant annual rentals. And the new requirements introduce a stark dividing line between leases and service contracts – the former will be brought on-balance sheet, while service contracts will remain off-balance sheet.The accounting changes do not affect cash flows directly. However, given the scale of the accounting change, it is expected that companies will be keen to understand the size of the lease liabilities arising from transactions they enter into between now and 2019.While most companies understand that the new standard will require them to bring most leases onto the balance sheet, what’s proving to be more challenging is deciding on the best transition option for them, how they will gather the data and what systems changes they will need.Planning an implementation projects takes time and care. Considering the following ten questions will give you an indication of the challenges ahead:1) How many leases do you have? In most cases, when applying the lease definition, companies have more leases than they think. The bigger your lease portfolio, the bigger the effect will be on the company’s key reporting metrics.2) Who holds your lease information?3) What new leases will you sign by 2019?4) How will IFRS 16 affect your KPI’s? From a profit or loss perspective, the EBITDA is expected to increase while the EPS is expected to decrease. From a balance sheet perspective, total assets are expected to increase, while net assets are expected to decrease.5) Will your covenant compliance be affected?6) Which transition method will you apply? Applying IFRS 16 retrospectively to all accounting periods will lead to an increased cost and increased comparability. Applying IFRS 16 as a ‘big bang’ on the date of application will be at a lower cost, however the comparability of financial information will be lower. Will practical expedients be applied?7) Will you apply the optional exemptions? They could save you time and money.8) Are your operating lease disclosures complete and accurate?9) What will you say about IFRS 16 in your 2017 annual report? Regulators and stakeholders will expect more robust and specific disclosures on the impact of the standard as we get closer to 2019. That puts your financial statements for 2017 and 2018 under the spotlight.10) Who owns your IFRS 16 implementation project?No analyst or investor should be surprised when your reported lease liabilities increase with the new standard. It is important to engage with your stakeholders and for them to know what to expect so that they are not surprised by the actual numbers when they see it. The new standard introduces new estimates and judgements affecting the measurement of the lease liability, which needs to be revised throughout the lease contract, therefore leading to possible volatility in the gross assets and liabilities.The time is now to act on the implementation project for the new IFRS 16 leases standard. Management needs to ensure that implementation projects are designed and on schedule. Where applicable, audit committees need to be actively involved in monitoring progress.For more information contact Berdine Coetzer (berdinecoetzer@kpmg.com), audit manager at KPMG Namibia in Windhoek.

IFRS 16: The new leases standard

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Republikein 2025-06-13

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IFRS 16: The new leases standard

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