IFRS 16, published by the International Accounting Standards Board, came into effect on 1 January 2019. Most organisations operating in Asia Pacific are aware of this new standard but may not be aware how best to make the transition.
This article was originally published by Future CFO.
The new leases standard will affect most companies in the region, because - simply put - most companies use rentals or leasing to access assets as it is a popular financing solution. It allows companies across all sectors to use property and equipment without incurring material initial cash outflows. In an effort to boost transparency, IFRS 16 eliminates the distinction between finance leases, which were previously capitalised on corporate balance sheets, and operating leases, which were not.
While implementation patterns vary widely across Asia-Pacific, IFRS 16 requires an early, considered response wherever you are. You should be communicating with all stakeholders to manage their expectations over the impact of the new standard and help guide your organisation through the difficult transition phase.
The importance of an informed choice
Consider your transition approach. IFRS 16 presents organisations with a choice of two basic transition approaches, both of which must be consistently applied to all leases.
The first is 'full retrospective', in which the new standard is applied retrospectively to all comparative periods with the financials for these periods, restated as if IFRS 16 had always been in effect.
The second is 'modified retrospective', in which the impact is booked from 1 January 2019 (or whenever the initial application date is for the company), and past financials are not restated.
Both approaches carry advantages and disadvantages. The full retrospective approach is clearly a more complex and resource-intensive undertaking but provides a better basis for comparability. The decision on which approach to employ must be carefully evaluated across several key factors.
These factors include your corporate trajectory. For firms planning an initial public offering or marketing to potential investors, the full retrospective approach will be virtually mandatory as sponsors and potential investors will demand the comparability it provides. For listed entities aiming to provide comparable financial information without the pain of applying a full retrospective approach, the use of 'pro-formas' in earnings releases and management discussion and analysis...