The new IFRS 16 standard
The new IFRS 16, which applies to the financial reporting of leased assets, enters into force from 1 January 2019. All leasing, as well as operating leases, will be reported as a finance lease.
All assets that companies use like operating leases will be activated and shown in the balance sheet as an asset. All leased assets will be shown in the lessee’s balance sheet, even though the leased property is not legally owned.
The valuation of these leased assets is determined in accordance with the procedure described in this standard and is based on the lease term. IFRS 16 applies not only to newly concluded lease agreements but also to all existing contracts.
The biggest impact of the new requirements will be the increase in leasing assets and financial liabilities of companies with a large volume of operating leases (i.e. leases not reported in the statement of financial position), such as retail companies (rental sales and warehouse space). At the same time, IFRS 16 changes the nature of the costs recognised in the income statement. IFRS 16 replaces the straight-line cost of operating leases under IAS 17 (recognised in operating expenses) with two types of costs: depreciation of the leasing asset (included in operating expenses) and interest expenses from the lease liability (included in finance costs). The new standard may therefore affect financial performance indicators and other financial indicators, such as asset turnover, debt to equity ratio, interest coverage, net income and cash flow statements. For some companies, this may mean a violation of credit agreements (covenants) due to a possible increase in their recorded debt, or a significant impact on their “performance” in relation to investors.
IFRS 16 does not deal with short-term leases with a generally low asset value (benchmark of USD 5,000) and leases closed for less than 12 months without the possibility of purchase and autorenewal.
More posts from Eva Pabiánová