IFRS16 Officially Hits Implementation Juncture
(21 August 2020 – Global) CFOs are preparing for the first reporting season with new International Financial Reporting Standards (IFRS16 – Leases) making its impact keenly felt.
The change comes with the added challenge of implementing new reporting requirements in the midst COVID-19 crisis induced uncertainty. Bringing the majority of leases on balance sheet through recognising a right-of-use asset over the term of the lease and a corresponding lease liability carries a number of critically important implications that have not yet been fully comprehended.
Every company using rentals or leasing as a means of accessing assets must comply with IFRS16 when preparing financial statements in 2020. The new requirements remove almost the entirety of off-balance sheet lending to enhance transparency and comparability in financial reporting. The reporting changes will have an impact on business models, processes and key sector verticals such as transport and airlines in particular, already reeling from COVID-19 related hits to activity and earnings. It is important corporates are adequately prepared to meet the new requirements.
The new requirements eliminate nearly all off-balance sheet accounting for lessees, with the aim of enhancing transparency and comparability in financial reporting. These changes may also affect loan covenants, credit ratings and borrowing costs. The sweeping new accounting adjustment impacts many commonly used financial ratios and performance metrics such as gearing, current ratio, asset turnover, interest cover, EBITDA, operating profit, net income, EPS, ROCE and ROE.
“IFRS 16 requires companies to transform their business processes in many areas, including not only finance and accounting, but also potentially IT, procurement, tax, treasury, legal, operations, corporate real estate and even HR. Management will also have the challenge of obtaining sufficient data to comply with the IFRS 16 requirement of having to separate lease and non-lease components and then allocating the consideration to these separate components” stated KPMG Partner for CFO Advisory, Andrew King.
“This will require management’s judgement when identifying those components and applying estimates to determine the observable standalone prices. Similarly, determining the lease term will also require judgement when recognising a right-of-use asset and lease liability, based on the likelihood of exercising options in the lease” Mr King added.
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