What does IFRS 16 mean? How to get a grip with it?

From 16th January 2020, any company with leased assets portfolio are working through IFRS 16 leases. You are probably wondering what does it mean IFRS 16?

International Financial Reporting Standards 16 (IFRS 16) is the first overhaul of lease accounting and affects most of the companies' reports involving a lease. It creates a substantial impact on financial statements and high-level equipment leases.

Want to know more about IFRS 16?

It was promulgated by IASB (International Accounting Standards Board) and was issued in January 2019. IAS 17 was the earlier leasing standard before IFRS 16.

The new IFRS 16 standard provides needed transparency on liabilities and leases assets on the companies.

You may probably ask "How to get a grip with IFRS 16?"

Here's the solution.

How to get a grip with IFRS16?

  • If you want to get a grip with IFRS 16, the first step is to make sure all the data has been correctly classified from all the leases (here, no grandfathering is allowed). Also, make sure all the supporting evidence must be filed and collated for the smooth audit process.
  • Now, you have to assess the new standard impact, and it should have on your accounts. This is the right time to interact with your stakeholders on the balance sheet, your profits, and KPIs.
  • Don't underestimate the additional time in collecting extensive disclosures and necessary information. The FRC expects the companies in the expansion of the new standard in annual accounts and reports.
  • If you understand the consequences of IFRS 16, then it is an opportunity to reflect on the financing strategy of the company for capital expenditure.
  • You have to update your audit plan for the new IFRS 16 standard to make audits easily. If you are an auditor, you have to approach audit testing, risk assessments, and documentation into account. You have to be more explicit in need for more staff and resources.

But wait. There’s even more about IFRS 16.

More Information on IFRS 16:

How does the lessee accounting model work in a nutshell?

IFRS 16 has introduced liabilities and single lessee accounting model raising from significant lease arrangements. Also, it introduces a "right to use" model to recognize the asset reflecting and lease liability reflecting to make the lease payments. Both the liability and asset will be accepted at the commencement of the lease.

How does the asset and liability model work for lessees?

Initially, the lease liability was calculated at the present lease payments and was discounted at lesser charges. The "right to use" asset value was calculated as:

  • Before the commencement date, the lease payments.
  • The initial measurement of the lease liability.
  • The incarnation of direct cost.
  • Estimating cost dismantling.

Has the "Lease" definition changed?

Yes, According to IFRS 16, lease conveys right to control the identified asset. An entity must be assessed for the lease throughout the period.

Has anything changed for lessors?

IFRS 16 is carrying the requirements of lesser accounting of IAS 17. That's why the lessor divided into its leases as the finance and operating leases. But, these two are different from one other.

Are there any changes in disclosure requirements for lessees?

There are significant changes occurred in financial performance, financial position, and cash flows.

How the IFRS 16 impacts financial statements of Lesse?

The vital effect of IFRS 16 is to increase the lease liabilities and lease assets which are recognized on balance sheets. Also, it leads to some significant changes in some financial metrics like debt covenants and gearing covenants. It also impacts on the profit & loss reports. The lease accounting doesn't change in excluding tax implications, because the economics doesn't change much. Under IAS 17, many entities are associated with cash outflows, which means the IFRS 16 results in a reduction of cash outflows.

How does IFRS 16 apply retrospectively?

IFRS 16 applies retrospectively to all the leases such as time-consuming and challenging leases. That's why IFRS 16 allows an entity to "grandfather" for its previous assessments. It doesn't mean to stay on the off-balance sheet.

For the lessees, are there any transition reliefs?

Lessees have two kinds of approaches: one is a modified retrospective approach, and the other is a full retrospective application approach. If the modified approach came to existence, then the lessee doesn't restate the comparative amount. That's why the cumulative effect applies to the equity at the initial application date, which is referred to as the annual reporting period.

Will FRS 102 become the updated version of IFRS 16?

In the process of harmonizing FRS with IFRS, the FRS will not incorporate the IFRS principles into FRS 102 at this point of time. There is a need for more analysis and evidence-gathering for the FRS 102 to update.

How does ICAEW help the companies to make the transition to IFRS 16?

The faculty of financial reporting produce the resources through the changes to the members. IFRS 16 fact sheet provides practical tips. Additional guidance will be provided at to review further information.

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  1. suma

    Thanks for sharing.

  2. suma

    Thanks for sharing.

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