IFRS 16 Leases
Why you should work with BDO on IFRS 16 Leases
IFRS 16 Leases may have a significant impact on balance sheet and results, especially EBITDA. It may also affect agreements such as earn-outs, bonus agreements and bank covenants that are linked to reported numbers. These agreements may need to be reviewed and amended as a result.
Complying with IFRS 16 may also require changes to systems and processes in order to obtain the information needed for accounting and disclosure requirements.
Our expert team will help you understand and prepare for the changes that will take place with IFRS 16. We will carry out a robust and independent impact assessment. We want you to be confident you are taking all the necessary steps and that your business is ready for IFRS 16.
We can also provide advice and guidance on any aspects of IFRS 16 that may be of particular concern.
Please get in touch to discuss how we can help.
For further details of how BDO can help, visit our financial reporting solutions page.
IFRS 16 Leases information and guidance
BDO has prepared a range of useful information and guidance to assist you and your business to manage IFRS 16 and its implications.
IFRS 16 Leases replaces IAS 17, SIC 15, SIC 27 and IFRIC 4 and sets out the principles for the recognition, measurement, presentation and disclosure of leases by lessors and lessees. It is applicable for accounting periods beginning 1 January 2019 but early application is permitted, provided that IFRS 15 Revenue from Contracts with Customers is also applied. However IFRS 16 is yet to be endorsed for use by those entities applying EU IFRS.
Impact on lessees
IFRS 16 removes the current classification of leases between operating and finance leases for lessees. Instead, lessees will bring all leases within the scope of IFRS 16 (other than those for which the short term or low value exemptions have been taken) on balance sheet, showing an asset for the right of use and a liability for the discounted amount of future payments.
For existing operating leases, the single amount currently included within operating results as lease costs in profit or loss would be split into operating and finance components. This will result in a front loaded expense profile compared to the straight line expense profile associated in the past.
Whilst total cash flows will remain unchanged, there will be a change in analysis within the cash flow statement as principal repayments will be included in financing cash flows and interest payments may be included in operating or financing cash flows, whereas under IAS 17 operating lease cash flows are included entirely in operating cash flows.
Impact on lessors
IFRS 16 substantially carries forward the lessor accounting requirements in IAS 17. A lessor continues to classify its leases as operating leases or finance leases, and to account for those two types of leases differently.
There are as yet no details of the UK tax changes which will be proposed by HMRC to address changes under IFRS 16. HMRC will consult further on this in summer 2017.
There will be transitional issues to consider, as well as how the changes should apply to land and buildings. Furthermore, the IFRS 16 change may impact tax deductibility under the new corporate interest restriction rules and groups may wish to model the combined impact.
IFRS 16 publications
- IFRS at a Glance – IFRS 16 Leases
A short ‘key facts’ document, setting out the key requirements for both lessees and lessors under IFRS 16, the key application guidance, key definitions and disclosures.
- IFRS in Practice - IFRS 16 Leases
This guidance looks at the scope of IFRS 16 and the required accounting for both lessees and lessors in detail, and the impact of IFRS 16 in practice, including a number of examples.
- Need to Know – IFRS 16 Leases
This publication provides an overview of the requirements of IFRS 16.
We also provide regular updates on this subject through our Business Edge email newsletter.
Videos which explore various aspects of IFRSs are available to view on the BDO IFRS YouTube channel.