IFRS16 – new accounting standard for lease agreements

IFRS16 – new accounting standard for lease agreements
Written By
Joanna Jankowska
In January 2016, the International Accounting Standards Board published the content of the latest leasing standard – IFRS16. The new standard, developed in cooperation with the American Financial Accounting Standards Board, will enter into force on 1 January 2019 and will significantly change the classification of lease agreements.

As of that date, every lease agreement will be included in the balance sheet as a finance lease. The previous standard did not have clear guidelines, which made it difficult for companies to properly qualify leasing and left room for manipulation of financial indicators. This problem was included in one of the published reports (WJ McGregor, Accounting for leases: a new approach – recognition by lessees of assets and liabilities arising under lease contracts). The author explained that the distinction between operating and finance leases is currently “overly arbitrary”, and lessees have the option not to include in their balance sheet assets that bring them benefits and liabilities resulting from operating lease that are charged from their account.

In connection with the above, the change will also apply to the method of determining EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization). The new accounting principles will result in an unambiguous interpretation of this financial indicator, which will increase the comparability of financial data of enterprises.

Who is affected by IFRS16?

The changes apply only to public companies that base their accounting on the IFRS standard. They will not apply to companies that only follow national accounting standards.

The existing lessors will not experience any major changes resulting from the emergence of the new standard. The changes will mainly apply to users of lease agreements (in particular operating leases). As of 1 January 2019, such companies will have to include the right to use the assets in their balance sheet. The changes will also affect tenants and lessees of real estate or other high-value assets. They will have to follow the new instructions on lease agreements and their settlement methods.

Consequences of the implementation of IFRS16

  • Unification of company income statements;
  • Increase of EBITDA;
  • Increase of fixed assets.

How to prepare for IFRS16?

  • Perform detailed analysis and identify the business areas affected by IFRS16;
  • Introduce system changes and invest in appropriate IT solutions;
  • Implement changes to your business strategy and adapting them to the applicable regulations.
Do you need a tailor made solution?
Joanna Jankowska
Marketing Specialist, Hicron

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