Lease accounting: IFRS 16 - compulsory for financial reporting 1 Jan 2019

It is timely to remind those in accounting and finance including treasurers and CFOs, that the IFRS 16 published by the International Accounting Standards Board (IASB) in 2016 on an opt in, voluntary basis will be compulsory on 1 January 2019. This represents a huge shift in how leases are accounted for under applicable accounting standards.

What is IFRS 16?

IFRS 16 now requires most leases (including operating leases) to be accounted for on balance sheet. Other asset use arrangements that are potentially broader than leasing may also need to be brought on balance sheet, which will increase lessees’ assets and liabilities. The income statement is also affected, as interest expense and depreciation applies to all on balance sheet leasing arrangements - not only finance leases.

Why does it matter?

If you have loan arrangements that continue, or are being originated, after 1 January 2019, you may wish to consider whether your loan documentation appropriately address the changes brought in under IFRS 16.

• Will your leasing permission monetary threshold be breached?
• Will your financial covenants need adjustment?

There are also other material implications that need to be considered.

Many borrowers will want to revisit their loan agreements and make adjustments to ensure that covenants appropriately address any IFRS 16 issues. Also, the blending of the distinction between finance leases and operating leases may mean that borrowers will need to separate them out in their accounting and reporting to their lenders once IFRS 16 has come into effect. This could become onerous, so borrowers need to be thinking about how to effect the best long-term approach.