From accounting periods starting January 2019 onwards, International Financial Reporting Standards (IFRS) 16 will force companies to list leasing commitments on their balance sheets, income statement and cash flow statements.
In the current system, leases are classified as either operating leases or finance leases, and then only operating leases are added to the balance sheet. This is unlike the new system, where all leases with a value of more than $5,000 will be “capitalised” by declaring them as lease assets, or with property, plant and equipment. This will result in both lease assets, as well as financial liabilities increasing on a balance sheet for many companies, which could result in a potentially significant change to some key financial metrics.
The main goal of this is to make a company’s leasing commitments more transparent, which should make it easier for an investor to estimate a company’s true level of debt. However, it should also allow for more accurate comparisons between companies that lease, and those that borrow money in order to buy assets outright.
The downside of this however, is that for companies with large portfolios of leased items the data capture process could be both time consuming and costly. Pete Graham of SAP Finance says when they started looking at this market in 2010, “we talked to around 500 customers and found there was only one who reported they already had full visibility of their leases.”
Best then, it seems, to prepare to meet regulations early, especially if your business is in a sector such as transportation, real estate, mining or construction. An effective date of 2019 is not as far off as it might initially seem.
For help with any of your accounting needs, please contact Stack & Jones Accountants on 01869 277973 for a free 1-hour consultation.
Sources: Accountancy April 2018 edition, icaew.com
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