The new leasing standard IFRS 16 – Leases (FASB: ASC 842 - Leases) requires lessees to recognize all leases on the balance sheet, except for short-term leases and leases of small assets, which will reflect their right to use an asset for a period of time. The lessor’s accounting largely remains unchanged. The changes are expected to have a pervasive impacts on people, policies, processes and systems.
The final standard on leasing, IFRS 16 – Leases, was issued in January 2016 by the IASB.
Also read our IFRS 16 Post-Implementation Survey, in which we investigated how the implementations of IFRS 16 went and where challenges persist. You can download the results below.
Balance sheets will grow, leverage ratios will deteriorate, and capital ratios will decrease. There is a change to both the expense character and recognition pattern. The new standard affects virtually all commonly used financial ratios and performance metrics such as leverage, current ratio, asset turnover, interest cover, EBIT, operating profit, net income, EPS, ROCE, ROE and operating cash flows. These changes are also expected to affect existing loan covenants, credit ratings and borrowing costs, and result in other behavioral changes. These impacts may also spur organizations to reassess their ‘lease versus ‘buy’ decisions going forward.
The accounting and financial impacts are only the tip of the iceberg. The pervasiveness of these rules requires companies to transform their business processes in many areas, including finance and accounting, IT, procurement, tax, treasury, legal, operations, corporate real estate and HR.
A well-executed impact assessment is a critical first step in the conversion process. Start preparing now to figure out how the leases standard affects your financial picture, your external stakeholders such as banks and investors, and the way you do business.
PwC’s team of professionals can help you evaluate the changes under the new regulations, determine how significant they will be going forward, lay out a path toward implementation and assist you throughout the implementation process. Some of the services we can perform are:
Our data-driven approach is designed to make it easy to identify, extract, structure and manage lease data from different sources and enables valuable and actionable insights into your lease portfolio. Our validation approach and strategy ensures data quality (accuracy and completeness). The lease data can be easily migrated to a permanent lease administration solution from the software vendors.
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