Sweeping transformation of current lease accounting rules will have widespread impacts for nearly all companies - how should you prepare?
International Financial Reporting Standard 16 (IFRS 16) represents an important and dramatic change in the way leases are accounted for by lessees. Operating leases will no longer simply be disclosed in financial statement notes - virtually every lease will be recognized on the balance sheet as a right-of-use asset with a corresponding lease liability. The impact on income statement presentation and other performance measures could be significant.
- Paul Feetham, Partner, Accounting Advisory Services, Toronto
IFRS 16 has a significant impact on many commonly used balance sheet and income statement ratios. For example, covenants in loan agreements, earn-out clauses in purchase agreements, compensation plans and many other arrangements often refer to ratios such as earnings before interest, tax, depreciation and amortization (EBITDA).
The complexity of your transition to IFRS 16 depends on many company-specific factors, such as the completeness and quality of your lease information and the systems you use to manage and account for leases. In addition, there are a number of policy choices, judgments and significant estimates you need to make both on adoption of the new standard and on an ongoing basis. Understanding these complexities is key to effectively managing adoption of IFRS 16 and communicating the impacts to stakeholders.
Being able to use global insights from companies around the world that are implementing this standard will help you develop robust policies and consider industry trends when implementing the new standard.
Developing a methodology that identifies what changes are necessary in your current processes, what additional information you need, the judgments and policy choices you must make and when to address each of the needs you identify will allow you to achieve a more efficient implementation and avoid unnecessary effort and duplication of work. A robust methodology will also enable you to develop documentation to support your audit process.
We firmly believe there is no single solution to each company’s challenges. Instead, we offer a stable of tools, including impact assessment reports, modelling of key terms, judgments and policy choices, extraction and compilation of lease data from contracts, data analytics and project management advice. These tools are integrated but modular, so you can draw on them as you need them.
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