Eight key IFRS 16 questions you need to answer

Have you resolved the theoretical, practical and commercial challenges involved in IFRS 16, the new accounting standard for leases? The standard enters into force on 1 January 2019, and you cannot postpone your obligations to comply with the regulations.

One of the requirements of IFRS 16 is that all future lease obligations must be recognised in the balance sheet. Under this model, the lessee recognises a financial obligation to make lease payments, along with an accompanying right to use the underlying asset.

The new rules remove almost all the lessee’s opportunities to avoid recognising leases in the balance sheet. As a result, many common key financial ratios, such as debt ratios and EBITDA, are being redefined. Consequently, IFRS 16 entails a significant change from the current standard concerning how lessees account for leases.

As a lessee, you will also have to adapt your systems and processes to the new standard. With almost all leases having to be recognised in the balance sheet, much more data about each lease will have to be obtained. This will involve more departments than just accounts. You must also ensure that you have the necessary internal processes in place in order to obtain the necessary information to implement the new standard.

Here is a checklist that may be useful when assessing the work that needs to be done:

1. What functionality does the company’s ERP system have with regard to IFRS 16?

2. Have you resolved the practical challenges involved in collating all the data about the company’s leases?

3. Do you have a suitable central solution for administering the leases?

4. Is this a platform where you can manage and monitor the leases in a commercially effective manner?

5. Do you have a solution that registers all the relevant financial data required to perform the new accounting calculations?

6. How will you arrive at the estimates that will form the basis for calculating the lease obligations and the value of the right of use? What data and methods will you use? What discount rate will you apply?

7. Will the company’s loan terms be changed when the lease obligations are recognised in the balance sheet?

8. Similarly, how will this affect bonus and remuneration schemes, acquisition decisions and the company’s ability to pay dividends?

Fortunately, quick and reliable answers can be found to most of these questions. House of Control’s IFRS module can be used independently of the company’s ERP/accounting system. It covers all relevant conditions, such as transitional rules, disclosure requirements, right-of-use calculations, lease obligations and lease payments.