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How companies can improve their IFRS16 related disclosures

12 December 2019

In November 2019, the FRC published a thematic review of disclosures provided by entities within industries in which the IFRS 16 implementation was expected to have most significant impact. The purpose of this article is to highlight and consider the FRC’s findings which are applicable to the industries sampled that have applied IFRS 16 for the first time in their interim accounts and entities that will be applying IFRS 16 for the first time in their year-end accounts.

What was the scope and purpose of the review?  

The FRC reviewed the interim accounts of a sample of 20 entities across a number of industry sectors including travel and leisure, support services and non-renewable energy. The review considered the comprehensiveness and quality of the disclosures provided by those entities against the requirements of IFRS 16 and IAS 1 Presentation of Financial Statements. The purpose of the review was to identify key areas of improvement as well as to highlight examples of good practice from published annual accounts. All but one of the companies sampled adopted the modified retrospective method.

What were the key improvement areas identified?

While the FRC identified a number of areas of good practice in the transition disclosures made from IAS 17 to IFRS 16, it found areas for improvement in the disclosures of most entities sampled. The following main areas for improvement were:

  • Significant judgements on adoption
  • Transition options
  • Comparability and use of alternative performance measures (APMs)
  • Transition disclosures

Significant judgements on adoption

Issue Suggested improvement
Disclosure of significant judgments  A number of the companies identified key judgments relating to IFRS 16, with the most common being judgment relating to lease extension or termination options. However, companies need to disclose entity-specific details about the judgment, including its impact, rather than just applying boilerplate disclosure 
Judgments involving estimation  Companies identifying key judgments involving estimation (eg calculation of the discount rate), need to include relevant disclosures such as sensitivity analysis in line with paragraph 125 of IAS1.
No judgment identified on adoption of IFRS 16  When companies have disclosed significant reconciling items between IAS 17 lease commitments and IFRS 16 lease liabilities (eg lease extensions or items which are not leases under IFRS 16), they need to carefully consider whether or not these are judgments within the scope of IAS 1 paragraph 122.   

Transition options

Issue Suggested improvement
Practical expedient - definition of lease    Companies that will not be taking advantage of the practical expedient (to not reassess whether contracts were or contained a lease under IAS 17 and IFRIC 4) need to disclose in their accounts evidence of reassessing their lease population under IFRS 16 criteria. 
Transition expedients versus recognition exemptions  Companies need to clearly explain whether they have applied transition expedients (as per IFRS 16 paragraph C10) or ongoing recognition exemptions (as per IFRS 16 paragraph 5 e.g. short-term leases). This clarity helps users understand whether this has been a one-off impact or is an ongoing accounting policy choice.
Modified retrospective – policy choice for the right of use asset Where companies have elected to use the option to measure some (or all) of their ‘right of use’ assets as if the standard had applied since commencement date, but discounted at the incremental borrowing rate ‘IBR’ at the date of initial application, they should disclose this in their accounts, making clear the IBR used is at the date of initial application. 

Comparability and use of APMs

Issue Suggested improvement
Comparability Under the modified retrospective method companies are not permitted to restate comparative figures. However, it should be made explicitly clear in the narrative reports accompanying the accounts where this is the case, and explain if both IFRS and APMs are not consistent to the prior year.
New APMs Where IAS 17 based figures are presented for periods after adoption of IFRS 16, these are APMs and should comply with ESMA’s Guidelines on APMs. 
Narrative report discussion should not be unduly focused on these figures over the statutory numbers based on IFRS 16.
Labelling Companies should be careful to appropriately label APMs and to not give undue prominence to them by, for example, referring to the statutory IFRS figures as “under IFRS 16”. 

Transition disclosures

Issue Suggested improvement
Explanation of reconciling items Most companies provided the required reconciliation between operating lease commitments disclosed under IAS 17 and lease liabilities recognised under IFRS 16 at the date of initial application. However, a number of companies failed to provide an explanation for significant reconciling items as required by the standard.
Tabular presentation of information  Paragraph 54 of the standard requires a lessee to disclose information required in paragraph 53 in a tabular format unless another format is more appropriate. Only one company in the sample reviewed followed this format, and companies are reminded that the tabular format can be a clear and concise way to provide the mandatory disclosures.
Loan covenants  The FRC noted that a number of companies disclosed that their leases include loan covenants linked to frozen GAAP. Where this is the case, disclosure is required to explain the potential cash flow exposures not reflected in lease liabilities. This information was missing from the examples reviewed. 
Modified retrospective – comparative Some companies risked confusing the users of their accounts by referring to their opening retained earnings figures as ‘restated’. Companies should clearly state that comparatives have not been restated. 

Next steps

The FRC is intending to review the full-year accounts of companies in its sample who had improvements to make as well as reviewing some additional companies. All companies applying IFRS 16 should familiarise themselves with the contents of this review, taking note of these improvement areas together with the examples of what the FRC considers to represent good practice.

For help and advice on leasing-related matters please get in touch with your usual BDO contact or Mark Edwards.

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