The New Leasing Standard: Changing the Landscape
IFRS 16 is effective for annual reporting periods beginning on or after January 1, 2019, and interim periods therein. The PRC Accounting Standards for Business Enterprises will converge with IFRS 16 as a whole, with the effective date expected to be in line with IFRS 16 as well.
The new lease standard establishes a new accounting model for lessees, bringing most leases onto the balance sheet and introducing expansive quantitative and qualitative disclosure requirements:
While lessor accounting is largely unchanged, the standard may affect lease negotiations as lessees adapt its operations and strategic decisions in response to the standard.
New leasing standard brings new challenges
Although the effective date of the new leasing standard is January 1, 2019, the new leasing standards will pose a number of challenges for businesses with a substantial number of operating leases even before the effective date. As the standard requires comparative figures from 2018, now is the time to consider how to implement the standard effectively. Companies must decide between available transition methods, the full retroactive approach or the cumulative catch-up method respectively, as well as identify applicable practical expedients, to find the most suitable presentation for its financial information going forward. All of these involve planning that will take a considerable amount of additional time and effort.
- Financial accounting
The new definition of a lease is based on a customer having a right to control an identified asset. Do you know which of your contracts are, or contain leases?
- Data collection
Entities will need to make sure systems and processes are capable of capturing all leasing data necessary to apply IFRS 16, including disclosures. Do you know how to efficiently capture key data from leasing contracts and prepare for the effective assessment of the impact of the new leasing standards?
- Impact assessment
The new lease criteria will result in new disclosure requirements in the financial statements, and may affect key performance indicators at the management level and financial ratio limitation of debt contract . Do you understand the changes to lease accounting will affect the company's budget, financial position, financial indicators, and the impact on operating results?
- Communication impact
Analysts and investors’ expectations need to be managed and potential impacts communicated well in advance. Loan agreements, remuneration plans and similar may all need to be renegotiated if entities are affected by the changes. Do you know the question of when and how to communicate the impact of the new leasing standards to affected stakeholders?
- Control process
The new standard requires more judgments and disclosures, such as identifying leases, assessing the duration of the lease, and choosing a discount rate. Do you need to update controls and related processes to meet the new standard?
- Tax implications
Changes in the way the costs are recognized may affect the actual amount and time of payment of the relevant taxes. Are you considering the potential tax implications of leasing?
- Information systems
Systems need to be able to track a variety of new information, including changes to the lease term, rent reviews, or changes in contingent rentals based on indices and rates, to make sure the correct accounting is applied. Internal control activities also need to be suitably robust. Are your systems and processes up to the task?
- Strategic planning
Entities may wish to reconsider lease/buy decisions or renegotiate terms of existing leases, for example considering shorter-term leases to avoid or reduce the impact of IFRS 16. Sale and leaseback structures may produce less desirable accounting given restrictions on the gains that can be recognized by sellers.
How can Deloitte help?
We can provide you with systematic solutions to enable a smooth transition and effective implementation of the new leasing standards in areas such as professional training, data preparation, impact analysis, communication assistance, flow charting, tax diagnosis, system optimization and strategy implementation.
- Professional training
We offer training and workshops tailored to specific industry needs to provide companies with the required knowledge on the new leasing standard.
- Data Preparation
We can help evaluate the company's current lease contract management, as well as consider key data extraction methods, to assist the company in its efforts to identify, collect and analyze key data from its lease contract.
- Impact Analysis
We can perform an overall assessment of how the new accounting standard will impact your financial statements, including which transitional options and practical expedients would be most beneficial to your company, providing support to your implementation decision.
- Communication Support
We can assist the company in developing communication plans regarding the potential impact on the new leasing standards with external stakeholders.
- Process Diagnostics
We can perform an overall evaluation of your company's processes and procedures, systems and controls, to identify the key changes to operational processes you will require to meet the new leasing standard.
- Tax planning
We can help to assess the local and overseas tax implications as the regulatory environment changes in response to the accounting standard.
- System optimization
We are experienced in supporting companies through ERP system changes whether implementing new accounting modules from third-party vendors, or with more bespoke projects in relation to IFRS 16 implementation.
- Strategy implementation
We can support you in your considerations of the new leasing standard on the company's current leasing strategy, to better manage the impact of decision-making.