What is IFRS 16 & What Do I Need to Know?
IFRS 16 effective date
|Effective date for companies||Fiscal years beginning on or after January 1, 2019|
IFRS 16 Summary
The International Accounting Standards Board (IASB) published the new IFRS 16 lease accounting standard, which replaces IAS 17. For the global community, IASB is responsible for developing and promoting the International Financial Reporting Standards (IFRS) for accounting.
IFRS 16 changes the way companies account for leases in their financial disclosures, including balance sheets and income statements. Under IFRS 16, a lessee applies a single lease accounting model where leases are considered finance leases. A lessor classifies a lease as either a finance lease or an operating lease.
Here’s what Ernst & Young (EY) says about the changes: “Whether you report under International Financial Reporting Standards (IFRS) or U.S. GAAP, you are likely to be facing significant changes in reporting requirements as you assess the impact of new standards for revenue recognition, financial instruments, and lease accounting. And these changes are not just impacting organizations reporting under IFRS and US GAAP — many national accounting standard setters are also aligning local standards to IFRS.” Read more here: IFRS Compliance Software & New IFRS Lease Accounting Changes
Definition of a Lease Under IFRS 16
Under IFRS 16, a lease is defined as a contract that enables international businesses to use another entity’s identified asset for a specified period of time in exchange for consideration. Common leased assets include:
- Real estate property, buildings, offices and warehouses
- Office equipment
- Medical equipment
- IT equipment
- Vehicles (automobiles, trucks, vans)
These contracts must specify a timeline in which the right-of-use of the asset is established (or an identified amount of use). It should also include all the potential economic benefits from using said asset. Simply put, some contracts that may not have been considered a lease with the original IAS 17 compliance standard, may now be a lease under IFRS 16 – and must be added to the balance sheet.
IFRS 16 Impact on the Balance Sheet
IFRS 16 requires most lessee leases to now be capitalized on the balance sheet. Essentially, leases must be recognized as “right-of-use” assets and correspond with their respective lease liabilities on the balance sheet.
However, if a lease’s terms happen to be under 12 months or low value under $5,000, they will typically be exempt from this new rule (assuming the asset itself isn’t recognized as high value or has purchase options).
Who Does IFRS 16 Impact?
Lessees who follow the International Financial Reporting Standards are affected by the new lease accounting standard. Over 160 countries all over the world will need to adhere to IFRS 16, including Spain, Ukraine, United Kingdom, Russia, Norway, Brazil, Japan, France and more.
History of IFRS 16
The International Accounting Standards Board introduced IFRS 16 in 2016. It is one of the most significant changes to their lease accounting policies in over 25 years. The goal of the new standard was to create transparency in representing leases on the balance sheet for all international businesses. IFRS 16 replaces IAS 17 as the new standard that all companies who operate under IFRS must adhere by and went into effect on January 1st, 2019.
IFRS 16 Transition Made Easy
Visual Lease provides international businesses with the tools to achieve and maintain IFRS 16 compliance while unlocking financial opportunities within their lease portfolios. Visual Lease’s powerful and easy-to-use cloud-based solution automates lease accounting, all in one centralized location.
Looking for a reliable lease accounting software? Click here to schedule a demo and see how Visual Lease can help you with IFRS 16.