The leasing standard IFRS16 has been made effective per January 2019. This has a drastic impact on every company using rentals or or leasing to obtain access to assets.

What is IFRS16?

The new financial reporting standard on leasing (IFRS16) aims to improve transparency and requires the lessees to recognize assets and liabilities arising from a lease, including their lease cars.

Important changes are:

• The new requirements eliminate nearly all off-balance sheet accounting for lessees
• A liability, equivalent to the lease rental amount, will appear on the balance sheet
• The asset will be depreciated on a straight-line basis
• The interest will be charged to the P&L on a reducing balance basis
• The accounting benefits of sale and leaseback transactions could differ
• Changes to the lease accounting standard have a far-reaching impact on the lessees’ business processes, systems and controls.

In practice

The new IFRS16 will require changes in accounting. Assessment of all contracts will be a very data-intensive process, more than you were used to. Under IFRS16 you may choose not to recognize assets and liabilities for leases with a lease term of less than 12 months. Lease terms of 12 months and older should be on balance. All relevant facts and circumstances that offer you an economic incentive should be considered. And there might be strategic impacts on KPIs, remuneration schemes, leasing strategy and loan covenants too.

Start preparing now!

So the new standard will have an impact on your organization. For a smooth transition, it’s necessary you start preparing now by:

1. Identifying all leases with an inventory of all lease contracts and examine the agreements;
2. Evaluating the impact on financial statements, business processes and internal controls, as well as the potential regulatory and tax implications of the changes;
3. Exploring whether current systems can easily support this change or if there is a need to evaluate and deploy a new solution.

Business Lease is here to help. Do not hesitate to contact us to be informed how the IFRS16 regulation impacts your company. Or watch this information video: