IFRS 16

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The IASB issued the new Leases standard on 13 January 2016, with effect from 1 January 2019.

Leasing arrangements provide an important financing solution for many organisations. They enable companies to use non-current assets without incurring a significant initial outflow of cash. Under the current leases standard, lessees may account for such arrangements as off balance sheet items (in the case of operating leases), or as balance sheet items (in the case of finance leases). IFRS 16 requires lessees to recognise on the balance sheet almost all lease agreements that reflects the lessee’s right to use the asset over a certain period of time, as well as any commitments to pay related rent. For lessors, the accounting treatment remains largely unchanged.

 

 

Practical implications

The new Leases standard will affect almost all organisations as practically all organisations are involved in leasing arrangements.  Applying the new standard is expected to result in a gross up of the balance sheet, and possibly change the timing of when rent and other lease related expenses must be accounted for and where in the profit and loss statement they must be presented. The new standard will affect almost all performance indicators used in practice, such as the gearing ratio, liquidity ratio, interest coverage ratio, EBITDA, operating profit/loss, net profit/loss, EPS, ROCE, ROE and the operating cash flow.

The impacts of the new standard are also expected to have an impact on an organisations strategy and decisions concerning the acquisition of assets (because a company’s decision to lease rather than buy an asset must be assessed according to new criteria).  It is important to note that the accounting and financial impacts are just the tip of the iceberg – the new standard is expected to have a comprehensive effect on companies’ processes,  and therefore impacts on an organisation’s IT, procurement, tax, treasury, legal, HR and operations functions in addition to the accounting impacts. 

IFRS 16 Leases - Interaction with other standards

IFRS 16 Leases - Interaction with other standards

Under IFRS 16, lessees will need to recognise virtually all of their leases on the balance sheet by recording a right of use asset and a lease liability. While this ‘gross up’ in total assets and total liabilities is the most obvious impact of adopting IFRS 16, there are a number of less obvious impacts that adoption of IFRS 16 will have, since it intersects with other IFRSs. This publication considers several consequences arising from IFRS 16, including impairment of non-financial assets, financial instruments, taxes and others.

Find out how companies can prepare for the implementation of IFRS 16 Leases: PwC

Find out how companies can prepare for the implementation of IFRS 16 Leases: PwC

PwC has published a new IFRS 16 Leases video which focusses on some key practical implementation challenges which preparers and others will be interested in. The video looks at some areas where we are receiving questions with increasing frequency: How to identify the discount rate to use in calculating the lease liability? How to assess the lease term ? What the available approaches to transition are, particularly how the simplified approach works ?

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Gábor Balázs

Gábor Balázs

Partner, PwC Hungary

Maria Williams

Maria Williams

Director, PwC Hungary

Miklós Novák

Miklós Novák

Director, PwC Hungary

Gábor Halmosi

Gábor Halmosi

Director, PwC Hungary

Roland Balogh

Roland Balogh

Senior Manager, PwC Hungary

Péter Heronyányi

Péter Heronyányi

Senior Manager, PwC Hungary

Enikő Könczöl

Enikő Könczöl

Partner, PwC Hungary

Ildikó Mészáros

Ildikó Mészáros

Manager, PwC Hungary

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