Insight

What is IFRS 16 and what does it mean for your business?

March 2017


The introduction of new accounting standard IFRS 16 from 1 January 2019 introduces significant changes governing the treatment of leases. Directed at improving balance-sheet transparency, IFRS 16 replaces the previous IAS 17 standard, which allowed considerable discretion in determining whether a lease was an ‘operating lease’ (which could be held off the balance sheet), or a ‘finance lease’, which could not. Under IFRS 16 almost all leases will now have to be treated as finance leases, effectively removing opportunities for off balance sheet accounting – a move which introduces significant implications for companies’ asset financing strategies, accounting methodologies, gearing, profitability and, potentially, credit ratings and borrowing costs.

What do you need to do?

The challenge, for most companies, will lie in sourcing, retaining, analysing and managing data on leases in place throughout the business, and deciding how to handle this in the transition to the new IFRS 16 reporting requirements – either by applying the new definition to all contracts in place, retrospectively, or merely electing for a ‘simplified’ transition method. In any event, all businesses will need to ensure full disclosure in respect of operating leases, with effect from 1 January 2019.

More broadly, companies will also need to assess the likely impacts on EBITDA, total balance-sheet assets, and gearing. In terms of financial statements, the key changes can be summarised as follows:

ASSETS LIABILITIES
Right-of-use assets Estimated dismantling and restoration costs
  Initial direct costs
  Leasing costs
  P&L
  Interest charges
  Depreciation


Collecting the data - how technology can help

Collecting the data necessary for full compliance post-2019 is likely to be the greatest challenge for most companies - particularly for those without centralised systems for managing their lease contracts. Most lease management programmes do not yet match the new IFRS 16 requirements, and will require additional functionality to be fully compliant. Such additional functionality is likely to include:

  • multi-dimensional, multi-entity and multi-currency management of lease contracts, including the legal, accounting and operational aspects of these;
  • sound valuation of lease assets and liabilities;
  • projections and revaluations for each reporting period; and
  • automated processing to simulate potential impacts on financial statements and accounting records.

Blimp360 software

Designed to meet the practical needs of SMEs, groups and multinationals in managing the transition to IFRS 16, Saint-Honoré Partenaires’ bespoke Blimp360 software is a fully integrated web-based lease contract management system, offering an integral contract approval process as well as full and efficient management of individual contracts and/or portfolios.

Full compliance with IFRS 16

Blimp360’s full compliance with the new IFRS 16 standard allows ongoing assessment of both specific financial indicators, as well as wider balance-sheet and financing implications. The Blimp360 programme automatically measures leasing costs and right-of-use assets, taking all of the new IFRS 16 parameters – including discount rates, likely lease periods, and restoration costs – into account. Automated alerts warn users of upcoming renewal and options deadlines well in advance.

Transition management

A dedicated module within the Blimp360 system means clients have optimum scope in choosing how to handle the transition process – either through retrospective restatements regarding existing leases, or by applying the new standard to new lease contracts only – as well as allowing flexible selection of key criteria.

The system includes automated calculation facilities, as well as user-defined reporting options and decision-making tools, and covers all key lease management criteria including fixed and variable lease costs, payment deadlines, cost indexation, renewal periods, options, incentives, and other related arrangements. Revised cost indexation or changes to leasing terms are automatically incorporated together with other contractual amendments, allowing the full modelling of potential financial implications and revised accounting estimates. Reporting is fully customisable, including for statutory reporting statements, simulations and projections, management accounting and financial analysis and reports.

While the new IFRS 16 standard does offer some exemptions – specifically for leases of less than 12 months’ duration and/or those with a ‘capital value’ of under $5,000 at the time of procurement –any business with high-value asset finance arrangements in place will need to take a close look at their current accounting strategy immediately. The integrated software of the Blimp360 system is designed to meet the scalable needs of all companies in simplifying this process.

A full introduction to Blimp360 software is available at www.blimp360.eu .