Get compliant with W.consulting's IFRS 16 cheat sheet
W.consulting will get you ready for the looming IFRS 16 compliance deadline: January 2019.
January 2019 is on the horizon, heralding a new era for leasing standards. Companies using rentals or leasing to access assets will be directly affected by the new International Financial Standards Reporting Standard (IFRS) 16 and the change is significant.
The more prepared you are, the lower the risks and the costs, says Bruce Mackenzie of W.consulting.
Says PwC in a report, “the pervasive impact of these rules requires companies to transform their business processes in many areas, including finance and accounting, IT, procurement, tax, treasury, legal, operations, corporate real estate and HR.”
Leasing is a good financing solution because it is cost effective. It provides flexibility and enables lessees to address residual value risk. PwC’s report adds that the impact on a lessee’s financial reporting, asset financing, IT, systems, processes and controls is expected to be substantial.
The report stated:
“Many companies lease a vast number of big-ticket items, including cars, offices, power plants, retail stories, cell towers and aircraft.”
Here’s what some of IFRS 16’s consequences are:
Financial metrics are going to be redefined
IFRS 16 redefines many commonly-used financial metrics such as EBITDA and, crucially, abolishes off-balance sheet accounting for lessees. This may affect credit ratings, borrowing costs, covenants, and indeed, your company’s image.
The shift from physical assets to services
IFRS 16 will affect a lessor’s business model because now the leasing dynamic has shifted. PwC notes it may also accelerate existing market developments in leasing such as an increased focus on services rather than physical assets.
The need for a cross-functional approach to implementation
Lessees now require more data around their lease owing to the on-balance sheet accounting for almost all leases. Companies need to embrace a cross-functional approach to implementation, not just accounting.
In conclusion, many companies may relook at their lease versus buy strategies. Balance sheets will grow, gearing ratios will increase, and capital ratios will decrease.
KPMG summarises IFRS 16’s changes well:
“For lessees, the lease becomes an on-balance sheet liability that attracts interest, together with a new asset on the other side of the balance sheet. In other words, lessees will appear to become more asset-rich but also more heavily indebted. The impacts are not limited to the balance sheet. There are also changes in accounting over the life of the lease. In particular, companies will now recognise a front-loaded pattern of expense for most leases, even when they pay constant annual rentals.”
Your company may need guidance to work through the change. Visit the CFO SA Training page to find out more about training offered by W.consulting. You’ll qualify for a 10 percent discount if you sign up with the code CFO2018.