Getting to grips with IFRS 16? No time to waste
16 January 2020: any company with a portfolio of leased assets will be working through the full implications of the new standard, IFRS 16 Leases, applicable for the first time in 2019. These changes have been a long-time coming and the impact on accounts is likely to be significant. Where should the focus lie?
“Having got to grips with the requirements, a key issue will be making sure that all the data has been collected so that all leases can be correctly classified (remember, no grandfathering is allowed so all extant leases must be covered) and the necessary calculations made,” says Marianne Mau, Technical Lead in the Financial Reporting Faculty. And don’t forget that there are exemptions for leases that endure for less than 12 months or for low value items (not defined but less than $5,000 in value has been suggested by the IASB as a guide). To ensure a smooth audit process, make sure all the supporting evidence has been collated and filed.
“You should now be in a position to assess the impact the new standard will have on your accounts, so this is a good time to start communications with your stakeholders about the likely effect on your profit, balance sheet and KPIs,” she says.
The standard increases the disclosure burden for lessees so it’s really important not to underestimate the additional time required to collect the necessary information and draft the extensive disclosures. The FRC has made a statement that it expects companies to expand discussion of the new standard in annual reports and accounts and this will be subject to an FRC thematic review in 2020.
When the consequences of IFRS 16 on accounts are understood, it may be an opportunity to reflect on the company’s financing strategy for capital expenditure. With nearly all leases on the balance sheet, is leasing still right for you?
If you are an auditor, you should update your audit plans for the new standard, so that your approach to risk assessments, audit testing and documentation takes into account the changes. Do make sure you are comfortable with the position taken by your clients on IFRS 16 and be clear whether you will need more staff, reviewers or resources generally in the first year of implementation.