New IFRS16 Leases Accounting Changes.
IFRS16 Leases was issued In January 2016 and is effective as from 1 January 2019. The new standard replaces IAS17 Leases.
Here are the major changes of the New Lease
1. The major change is that under IFRS16 there will no longer be any distinction between operating and finance leases in the financial statements of lessees. Previously the lessees accounted an item as an operating lease if most of the risks and rewards have not been transferred to them. Therefore, a rental expense was recorded on a straight-line basis over the lease period. Under IFRS16 this accounting treatment does not exist, with an exemption for low-value items or shot-term leases, i.e. not exceeding 12 months. Instead, entities are required to include a right-of-use asset and an equivalent liability, at the present value of lease payments. In that way, entities will include a significant amount of assets and liabilities in the statement of financial position.
2. In addition, there is also a change in the statement of profit loss. Under IAS17, rentals of operating expenses were shown as an operating expense on a straight-line basis and same amount was expensed each year. Under the new standard, a depreciation expense and an interest expense are recorded every year. Higher interest expense is recognised in the earlier years of the lease, as the outstanding lease balance is higher.
3. Moreover, under the new standard, performance ratios will be significantly changed. The gearing ration will be higher as there will be additional liabilities. EBITDA (earnings before interest, tax, depreciation and amortisation) are likely to increase, because operating rentals previously recognised under IAS17 will no longer exist and will be replaced by depreciation and finance costs under IFRS16.
Which industries mainly affected?
Certain industries will be more impacted than others by IFRS 16.
The retail industry is likely to be one of the most affected by the new standard, as a result of the use of rented premises for their stores.
The airline industry will be heavily impacted too, as most airlines hold aircraft, ground facilities and terminal space under leases.
Telecommunication industry is also be among the entities that are most likely to be affected by the new standard as most of them enter into lease agreements for the right of use of towers and network system.
Transition and Application
IFRS16 is effective for reporting periods beginning on or after 1 January 2019. IFRS16 allows a number of choices when choosing the transition method in applying the new standard. A careful analysis is required on the choice of the most appropriate transition approach, as this will not only affect the financial statements at the adoption date but also for future years. Finally, entities need to carefully read and understand the changes of the new standard and how to apply and disclose these into their books.
PHS & Partners has the expertise and technical knowledge to help all entities that require smooth transition and IFRS specialists who can provide advice and technical guidance to all clients.
If you want more advice on New IFRS 16 leases or on any other Services we provide you can contact us and get more information for free.
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