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IFRS 16

Video - Lease Accounting Software for IFRS 16 Compliance

This video explains the Lease Accounting Process and includes a product demo showing how Planon software addresses the IFRS16/FASB lease reporting challenges. 11:25

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IFRS 16 is a new lease accounting regulation from the International Accounting Standard Board (IASB) that will require publicly listed companies to include on their balance sheets all leasing contracts with a contract term longer than one year.  It is the global standard for lease accounting, in combination with ASC 842 from the Financial Accounting Standards Board (FASB) in the United States. The IFRS 16 effective date for an entity to apply these new standards for annual reporting periods begins on or after 1 January 2019.

As we move closer to this date, organisations need to consider how they will comply with this standard. Because of the complexity of the new lease accounting standards, IFRS 16 software is required to meet all the regulations and report in a compliant way.

Comparison between IAS 17 and IFRS 16

The previous accounting model for leases (IAS 17) required lessees and lessors to classify their leases as either finance leases or operating leases and account for those two types of leases differently. That model was criticised for failing to meet the needs of users of financial statements because it did not always provide a true representation of leasing transactions. In particular, it did not require lessees to recognise assets and liabilities arising from operating leases.

IFRS 16 introduces a single lessee accounting model and requires a lessee to recognise assets and liabilities for all leases with a term of more than 12 months, unless the underlying asset is of low value. A lessee is required to recognise a right-of-use asset representing its right to use the underlying leased asset and a lease liability representing its obligation to make lease payments. This approach will result in a more realistic representation of a lessee’s assets and liabilities and, together with enhanced disclosures, will provide greater transparency of a lessee’s financial leverage and capital employed.

IFRS 16 establishes principles for the recognition, measurement, presentation and disclosure of leases, with the objective of ensuring that lessees and lessors provide relevant information that truly represents those transactions. [IFRS 16:1]

What will be the impact of IFRS 16 on the organisation?

As a result of moving from IAS17 to IFRS16, the main difference will be an increase in lease assets, finance lease liabilities and EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortisation).

Identifying a lease

A contract is, or contains, a lease if it conveys the right to control the use of an identified asset for a period of time in exchange for consideration. [IFRS16:9]

Control is conveyed where the customer has both the right to obtain substantially all the economic benefits from use of the identified asset and to direct the use of that asset. [IFRS16:B9]

An entity shall apply this Standard consistently to contracts with similar characteristics and in similar circumstances.