The International Accounting Standards Board (IASB) issued a new IFRS16 Leases standard, introducing considerable changes in the method of accounting for leased assets. The new standard will affect a large number of business entities. Even though the new regulation will not become effective before 1 January 2019, it is worth preparing for its implications as soon as possible.
The standard’s primary objective is to report leases in the balance sheets of lessees, which will affect both lease providers and all companies using leases for their operations. Those who acquire a significant portion of their assets via leases will see an increase in the reported assets and liabilities. The higher the number of leases used for business, the greater the impact the change in accounting will have on a business. It will eventually affect the amount of recognised profit and other key financial indicators such as debt ratio and EBITDA. This may be vital for previously agreed-on credit financing, for example.
In addition to impacts on the balance sheet, entities must take into account that they will report a bigger part of lease expenses at the beginning of the contractual period even if they pay invariable annual rents. The standard also distinguishes between lease and servicing contracts. Whereas assets relating to lease contracts will be reported in the balance sheet, the servicing part will be recognised in the income statement. To meet all new requirements, entities might have to change a number of concluded contracts.
The new standard becomes effective in 2019. Considering the extent of potential implications for entities’ contractual documentation and financial planning, we recommend commencing a standard-related analysis and associated decision-making processes sufficiently in advance.