IFRS 16 - The Leases standard

The IASB announced the new leasing standard in January 2016 – it comes into effect on 1 January 2019.

Leasing is an important financial solution used by many organisations.  It enables companies to use property, plant, and equipment without needing to incur large initial cash outflows.   Under existing rules, lessees generally 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 which will reflect their right to use an asset for a period of time and the associated liability to pay rentals. The lessor’s accounting’ model largely remains unchanged.

What’s the issue?

Virtually every company uses rentals or leasing as a means to obtain access to assets, hence will be impacted by the new standard.

Balance sheets will grow, leverage ratios will deteriorate, and capital ratios will decrease. There is a change to both the expense character and recognition pattern. The new standard affects almost all commonly used financial metrics such as gearing ratio, current ratio, asset turnover, interest cover, EBIT, operating profit, net income, EPS, ROCE, ROE and operating cash flows. These changes may have knock-on effects on an entity’s arrangements with various stakeholders such as banks and lenders, investors and analysts and employees. These impacts may also spur organisations to reassess certain ‘lease versus ‘buy’ decisions going forward.

The accounting and financial impacts are just the tip of the iceberg. The pervasiveness of these rules may require companies to transform their business processes in many areas, including finance and accounting, IT, procurement, tax, treasury, legal, operations, corporate real estate and HR.

How we can help

The practical application of the sometimes form-driven, often complex, accounting literature and applying it to the specific facts and circumstances around your business can be challenging. Our team of leasing specialist across the world can help with: 

Helping you understand how the standard is likely to affect you, how to raise awareness, what you need to do and who you need to involve to implement the new standard. 

We can help you project manage the implementation process and ensure a robust governance structure is in place.

 The new standard requires a deep understanding of leasing, the applicable guidance, and requires new interpretations and judgments. Our team has the expertise and tools to help you get this right.

We can help gather relevant data with automated extraction tools and we have the analysis capabilities and modelling tools to help you understand the impact and make the right decisions on leases.

With the changes in lease accounting and increased transparency, you might determine that your contracts require changes or your lease versus buy decisions may change. We can help assess the risks in your lease portfolio, areas of potential costs savings and lease portfolio optimisation.

You may need to implement new systems, business process and control to comply with the new leases standard. We know the lease software vendors and can help to assess, select and implement the right vendors and software applications.

Contact us to learn more about how we can help you ensure your financial reporting will be compliant with the leasing standard – and manage your lease business and process transformation in an efficient and measured way.