IFRS 16: Are you ready?

Working through the implications

First issued in January 2016 and effective for most companies that report in 2019, this new International Financial Reporting Standard affects accounting for leases. This impacts many corporates’ reported earnings, assets and liabilities, and changes the classification of expenses and cash flows, such that reported results and the associated impact on covenant tests. In fact, given that the new definition of a lease will now be based on the right to control an asset, for many, IFRS 16 will be the most significant accounting change for the last 20 years. As such, even companies who are well progressed with their transition implementation, are not immune from ongoing implications which require clear consideration.

What are the implications?

  • It can substantially alter the balance sheet, income statement, cash flow statement and other key metrics used to value and manage the business.
  • It requires companies to comply with extensive data requirements, beyond what they have been used to in the past, both at the date of transition and thereafter.
  • The majority of companies with more than 100 leases have needed to procure or develop new systems to manage the complex calculations.
  • Companies may now want to revisit their leasing strategies, investment appraisal processes or look for smarter contract options.

What are the challenges?

In our experience the extent to which companies are prepared for IFRS 16 varies. Some companies are fully prepared. Others, meanwhile, might still value professional assistance with implementing the changes. Whatever their stage of preparedness though, IFRS 16 isn’t just a pure accounting change. The practical challenges and implications are far wider:

  • It requires navigating different transition options, practical expedients and exemptions, and working out which of these are the most beneficial;
  • It requires identifying all leases which fall under the new leases definition (there can be some significant judgement), and gathering all relevant data;
  • It requires applying a degree of judgement around which discount rates and which lease terms should apply;
  • It requires the implementation of new systems and company-wide processes to deal with both the complexity of the calculations and to ensure ongoing compliance;
  • Its effective implementation requires involvement from many parts of the business including finance, treasury, IT, property, HR, legal and procurement;
  • It requires a thorough understanding of tax implications; and
  • It requires deep knowledge of what this means for internal performance measurement and future leasing strategy.

How Deloitte can help?

Our team of experts provide a highly professional advisory and support service for clients needing help with the implementation of this new standard and all its ongoing implications.

As well as providing integrated support in the areas above, we also provide support in all of the areas of challenge including accounting advice (discount rates), training and workshops impact assessments, assurance over data, systems and reporting, modelling and systems solutions, controls and process design, tax advice and leasing strategy advice.

We use our international network for the benefit of our clients, to develop specific industry guidance and benchmarks, where judgement has to be applied and practice continues to emerge.