Communicating the expected impact of IFRS 16
08 January 2019
IFRS 16, the new accounting standard for leases, became effective on 1 January 2019.
Companies reporting under IFRS are required to disclose information about IFRS 16 in reporting periods prior to adoption, including:
‘known or reasonably estimable information relevant to assessing the possible impact that application of the new IFRS will have on the entity’s financial statements in the period of initial application’.
As IFRS 16 is expected to have significant impact for many companies, regulators including the Financial Reporting Council (FRC) and European Securities and Markets Authority (ESMA) are showing a heightened level of interest in the disclosure companies make in their last set of accounts before IFRS 16 is adopted. ESMA’s recent statement sets out that because 2018 annual financial statements will be published after the requirements in IFRS 16 become effective, it expects issuers will have substantially completed their implementation and will provide high quality, entity specific, qualitative and quantitative disclosures. The FRC set out similar expectations when it announced its plan to undertake a thematic review of IFRS 16 disclosures in 2019 interim accounts.
So what should companies consider disclosing in relation to the impact of IFRS 16?
The key objective of the disclosure is to provide relevant and useful information to users of the accounts. Key criticisms of similar disclosures in the past, for example, prior to the adoption of IFRSs 9 and 15, included the disclosure being too high level and generic to be useful. Users of the accounts and regulators want to see more than a bland statement that IFRS 16 will be effective from 1 January 2019.
We recommend that companies consider disclosing:
- When IFRS 16 will be first applied by the company including the first reporting date when IFRS 16 effects will be reported (this could be interim financial statements if relevant to the company).
- Information about the company’s implementation plans including the company’s intended transition approach (eg cumulative effect or fully retrospective).
- A concise company-specific description of the changes introduced by IFRS 16.
- Key judgements and estimates the company expects to make. This may include, for example, considerations such as the nature and characteristics of contract types, and, where significant judgement was involved. Companies should disclose the main assumptions used in the determination of right of use assets and lease liabilities (such as the assessment as to whether a contract contains a lease, determination of lease terms, discount rates and the separation of lease and non-lease components).
- Quantification of the expected impact (assets, liabilities, reserves and profit/loss as applicable).
- Where relevant, which key performance indicators and Alternative Performance Measures (APMs) will be affected and what the effect is expected to be.
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.