The IASB has announced and published the new leasing standard IFRS 16 ‘Leases’

What’s changed?

On 13th January 2016 the IASB finally announced its long awaited project on lease accounting. The new standard, IFRS 16 Leases which comes into effect on 1 January 2019, requires lessees to account for their leases under a single accounting treatment, bringing almost all leases ‘on balance sheet’ and recognising a right of use asset and a lease liability. The changes will affect around 1 in 2 listed companies and will have a substantial impact on companies that currently use IFRS to report on their leasing. At present, for lessor’s the finance and operating lease distinction and accounting remains largely unchanged.

What are the implications?

Leasing is a significant alternative form of financing for many organisations. It provides companies a means of obtaining the right to use an asset without incurring the substantial initial cost associated with buying an asset outright. Almost every company who utilises leasing as a form of financing will be significantly affected by the new standard.

In addition to bringing substantial assets and liabilities on balance sheet, the new standard will also have an impact on reported profit performance, financial ratios, performance measures and other financial metrics. IASB estimates that bringing leases onto the balance sheet will increase earnings before interest, taxes, depreciation and amortisation (EBITDA) all by 10%. Additionally, complexity also exists surrounding the new definition of a lease and determining whether a lease even exists in the first place. Within the new standard a lease is defined as ‘a contract, or part of a contract, that conveys the right to use an asset for a period of time in exchange for consideration’. The new definition in practice may mean that contracts formally recognised as a lease are now recognised as services and vice versa.

The practical implications of the new standards provide lessees with the incentive and opportunity to profit from the transition to the new standard by improving lease management decisions at an operational level. Departmental transformations, changes to IT infrastructure, processes and applications are just a few considerations that key decision makers in accounting, treasury, legal and procurement will have to make that will have long lasting effects on a company’s leasing activity.

Although 1st January 2019 seems like a long way off, lessees should start preparing now. With the sheer volume of leases and lease contracts involved, along with the associated balance sheet implications, realistically it will take a company 12 months to locate and analyse every lease affected by the new standard.

How we’ll help you prepare

Achieving full compliance to the new standard, along with the associated complexity of application of the guidelines in line with individual business circumstances is difficult and challenging. Our lease management services and software help businesses overcome these challenges in a number of ways:

Our team of leasing experts have monitored the new rules since they were first proposed and have the knowledge and expertise required to help you better understand the changes, identify how they’ll impact your business and what you’ll need to do to achieve compliance.

We’ll help you consolidate your lease details and documentation on one data repository; from here extracting the critical figures needed for your financial statements is easy. With our lease accounting software, LOIS, you’ll be able to run powerful reports that perform all the complex calculations for you, allowing you to maintain full compliance.

With the changes to lease accounting and the adjustment to the definition of a lease, you may wish to consider renegotiating certain leases and to evaluate existing contracts. Our leasing experts are well placed to help assess the implications and threats associated with your portfolio and identify potential opportunities for optimisation and cost savings.

In order to meet transition requirements, many businesses will need to implement new control measures, systems, processes and software. Our lease management and accounting software, LOIS, has been developed with lease accounting in mind and gives you all the tools and features needed to facilitate compliance.

Learn more from our guide ‘IFRS 16 at a Glance: A Brief Overview’ – here you’ll get a clear understanding of how IFRS global lease accounting standards have changed and the practical implications this will have on your business.

IFRS 16 at a Glance

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