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IFRS 16 disclosures in interim financial statements

04 June 2019

For many companies, the effects of applying IFRS 16 will first be reported in interim financial statements prepared in accordance with IAS 34. The significant changes that IFRS 16 brings is likely to be a focus area of investors, regulators and other key stakeholders. Companies will therefore need to ensure disclosures are robust and explain the changes in a clear and concise manner.

What should a company think about when explaining the effects of IFRS 16?

What a company discloses in relation to their transition to IFRS 16 will come down to individual facts and circumstances. In particular, companies may wish to consider:

  • How material is the effect in relation to the financial performance and position of the company?
  • Whether any key performance indicators are affected and, if so, how significantly?
  • What are competitors reporting in relation to transition to the new accounting standard?
  • The expectations that have been set by any key stakeholders, including investors and regulators.

What are the precise requirements in the accounting standards?

IAS 34 does not provide any significant guidance on what needs to be disclosed in interim reports when a new standard is applied for the first time; rather, it simply says companies must disclose ‘a description of the nature and effects of the change’. To explain the transition to IFRS 16 in a way that is useful to stakeholders, we think companies should consider disclosure of:

  • A full description of the new policy including recognition and measurement principles applied in the current reporting period
  • A description of how the new policy contrasts with the previous policy   
  • The key judgements made by management in applying IFRS 16 (eg assessing whether an arrangement contains a lease, any judgements made in assessing the lease term, calculation of the discount rate, separation of lease and non-lease components etc.)
  • Details of the transitional provisions adopted, for example whether the company is applying IFRS 16 on a fully retrospective basis or whether it is making use of transitional provisions and/or practical expedients (companies may wish to refer to IFRS 16.C12-13 requirements)
  • The amount of adjustment for each line item materially affected – this would apply equally to current and prior year line items that have been restated, or if IFRS 16 has been applied on a modified retrospective basis, the amount of transitional adjustment to equity at the start of the current period
  • Where transitional provisions have been applied, sufficient commentary on comparative amounts if they are not directly comparable with current period reported figures
  • The effects on basic and dilutive earnings per share where the company is required to report these metrics
  • The effects on any alternative performance measures presented, for example EBITDA.

What have regulators said about their expectations?

The Financial Reporting Council (FRC) has announced that it will undertake a thematic review of disclosures relating to the implementation of IFRS 16 within 2019 interim accounts. When making its announcement, the FRC took the opportunity to set out its expectations of what companies should disclose.

Where can I find out more?

More information about IFRS 16 and its impact can be found on BDO’s dedicated IFRS 16 webpage. Alternatively, please get in touch with your regular BDO contact or Mark Edwards.

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