At the minute there is a lot of talk within the accounting sphere around IFRS 16 and many businesses are working hard to get their accounts ready to report under IFRS 16. However many people are still left wondering what IFRS 16 actually is.
So, what is IFRS 16?
IFRS 16 is the new lease accounting standard applicable for businesses reporting under International Financial Reporting Standards (IFRS). It replaces the current leasing standard which is IAS 17 and will essentially consolidate the accounting treatment for both finance and operating leases rather than having them treated separately.
When does IFRS 16 apply from?
IFRS 16 became effective for all businesses with a financial reporting period beginning on, or after, the 1st January 2019.
What changes will IFRS 16 bring?
The main difference, as mentioned above, is that under IFRS 16 operating leases and finance leases are now to be treated in the same way. Operating leases can no longer remain “off balance-sheet” and will be included in the initial “right of use” asset that a business will have to recognize on its balance sheet. This means operating leases are no longer just a disclosure in the notes of the accounts but a real asset that will be depreciated over the useful life of the asset to the business.
Under IFRS 16 the accounting treatment for leased assets is brought more in line with the accounting treatment for actual fixed assets and although the new standard may be quite complex to understand initially, once people get used to it it should become more intuitive.
How can businesses prepare for the changes?
Preparing for IFRS 16 will be easier for some businesses than it will be for others. The main steps that all businesses need to take are:
- Ensuring all underlying lease agreements are available for use in the new lease standard workings.
- Taking some time to understand how the incremental borrowing rate is calculated – if this is tricky, consider seeking help from a professional.
- Accepting that transitioning to IFRS 16 is not the most simple thing your business will do in terms of accounting – it will take time and you may not get it right the first time.