IFRS 16 – Leases from 1 January 2019
Many businesses must be able to prepare their reports and related information not only in accordance with Czech laws and accounting standards, but also with International Financial Reporting Standards (IFRS). These companies are preparing regular reporting for their foreign parent companies or supporting documents for the consolidated financial statements.
The last major change to IFRS standards, effective from 1 January 2019, is a change in the reporting of operating leases, which is regulated by IFRS Standard 16. The change is a blurring of the earlier difference in financial and operating leases. What is its essence?
As a simple example, let us choose a car lease with a total value of CZK 1,000,000 for four years at an interest rate of 4 %.
1. Where can we find it in the lessee’s balance sheet?
The right to use the leased property will be newly recognised in assets, i.e. similarly as “own” property. By contrast, liabilities will show the present value of the future liability (will be determined by discounting). Lease payments are recognised as a reduction, repayment of this liability and do not affect the profit or loss.
2. How does it affect the lessee’s income statement?
The right to use leased assets is depreciated and the discount is recognised as an interest expense. In contrast to the earlier adjustment, the nature of the cost and timing has changed (due to the discounting of the liability).
3. Which operating lease does IFRS 16 cover?
- It must be a specific, concrete asset that the lessee directly controls and gains economic benefits from.
- This is not a short-term lease (minimum period of 12 months).
- This is not a low-value lease.
Determining values is usually not as simple as this example. In practice, you will be dealing with more complex cases, starting with deciding whether IFRS 16 is concerned at all. The calculation itself may make it more difficult to set repayment variability, determine the discount rate, change the lease period, the cost of bringing the asset to its original state, the conditions for obtaining a more favourable price, and finally, the first application of these rules.
The change will mainly affect lessees and, for longer leases, can significantly affect the balance sheet values and resulting economic indicators. From an external user’s perspective, this “uncovers” the view of closed lease relationships directly in the balance sheet without “hiding” them in an annex, as used to be the case.
So it’s high time to reflect on how the new IFRS 16 has influenced your business’s economic picture and whether you are choosing the right conditions to enter into lease agreements.
More posts from Hana Patočková
More from MO(O)RE News Czech