IFRS 16 is a financial reporting standard that covers all leases. Under IFRS 16, there are major changes in the management of leasing from the financial side. What new obligations have fallen on entrepreneurs? What do I need to know about IFRS 16 to impact the company’s balance sheet? What tools to use to expedite and automate leasing reporting? We invite you to read the article in which we answer the most frequently asked questions about IFRS 16.
IFRS 16 standards – what has changed in the 3 years of applying the new standards?
The IFRS 16 standards entered into force on January 1, 2019, introducing a uniform accounting model for leasing contracts. Lessees must therefor recognize all contracts for the benefit of the use of various assets in the balance sheet. Therefore, IFRS 16 abolished the possibility of off-balance sheet recognition of leased assets. The recognizable asset in the company is no longer the thing itself, but the right to use it included in the leasing contract. Management of lease contracts in the light of IFRS standards has been removed from the distinction between financial and operating leases for lessees.
Moreover, the IFRS standard as leasing also applies to contracts for the provision of certain services, e.g. rental of business premises or IT services. These principles not only forced companies to adapt their accounting policies and IT systems to the new IFRS standard, but also had a significant impact on most of the financial indicators allowing to assess the condition of the enterprise. Including lease in the balance sheet increased the balance sheet total and EBITDA. However, the IFRS standard did not introduce any significant changes from the point of view of lessors. For them, the distinction between finance and operating leases has continued.
What is the management of leasing contracts according to the IFRS standard?
The direct implication of the need to present the leasing contract in the lessee’s balance sheet was the increase in the category of assets and liabilities, as well as the above-mentioned changes in the basis for the calculation of economic ratios. The management of leasing contracts in the light of the IFRS standard entailed modifications in the classification of rental costs, interest and depreciation. Data collection and archiving tools that need to take into account the influx of new information about leasing contracts have also been significantly increased in efficiency. The lease period begins from the date the asset is made available to the lessee until the end of the lease.
The IFRS standards also apply guidelines for the measurement of leasing liabilities. It takes place in relation to the amount of discounted future payments over the entire term of the contract, using the so-called lease interest rate. The base rate adopted for the calculation of leasing costs is most often the WIBOR 1M or 3M rate. Leasing obligation IFRS standards require measurement also in relation to optional fees, such as the residual value of assets, the realization price of the possibility to purchase the leased object, or penalties for early termination of the contract. Re-valuation will be necessary after modification of the original assumptions of the lease agreement (e.g. reduction in the value of the lease).
The scope of IFRS 16 does not include lease agreements for biological assets, lease agreements in the field of exploration for oil and natural gas, license agreements in the field of copyrights, and agreements concluded for a period not longer than 12 months.
It is easy to make a mistake in the process of managing leasing contracts in accordance with the regulations. The more important are advanced IT tools, adapted to the IFRS 16 standard. Adjusting the management of leasing contracts will be easier with the ILA16 application (Incube Lease Accounting & Contract Management), built on the IBM Planning Analytics (TM1) platform and being a complete solution for controlling the entire Lease accounting workflow.