IFRS 16 Implementation Across APAC Has A Major Impact To Company's Financials, Operations, Key Metrics And Treasury Strategy

International accounting standards on treatment of leases became effective on 1 January 2019. It is vital that companies understand the serious impact this can have on their finance and operations.

The International Accounting Standards Board (IASB) continues to undertake major projects to improve its International Financial Reporting Standards (IFRS). The IFRS 16 directive, announced in January 2016, became effective 1 January 2019, replacing IAS 17. This new standard for reporting on leases provides greater transparency on companies' lease assets and liabilities and shines a light on arrangements that were previously accounted for as off balance sheet financing under IAS 17.

What is IFRS 16?

IFRS 16 is the new IASB accounting standard concerning the treatment of leases. It provides a new definition of what a lease is, and also outlines the principles for recognition, measurement, presentation and disclosure of all leases, with the exception of leases for exploration of oil, natural gas, minerals and similar commodities, licences of intellectual property granted by a lessor and rights held by a lessee under licensing arrangements of all types, including copyrights, and service concession arrangements, all covered by other accounting standards.

Under IFRS 16, subject to certain recognition exemptions, companies must bring operating leases onto the balance sheet (only finance leases were accounted for as such previously) and can no longer leave them as off balance sheet items subject to often unexplained analysis and adjustment. For lessees, the distinction between operating and finance leases under IAS 17 is eliminated. This provides transparency of all major leases held by a company but has a potentially significant impact to the financials and operations of a company.

It should be noted that IFRS 16 does not fully converge with the equivalent standard under US GAAP (ASC 842), so those companies doing business in APAC countries and the US ("dual reporters") must continue to apply different lease accounting models.

Major Impact is on Lessees

With all major leases now being reflected on the balance sheet, lessees will appear to have increased their assets, with a right of use ("ROU" - the contractual right to use an asset held under a lease) asset, but will be impacted on the liabilities side with an increase in indebtedness due to the present value of forward lease payments being recognised as a liability.

Profit & loss (P&L) is also...