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.