On 1 January 2019, IFRS 16 (International Financial Reporting Standard) comes into force, obliging certain companies to include their leases in the income statement.
IFRS 16, implemented internationally, aims to reorganize the location of a company's lease contracts within its annual accounts and balance sheets, establishing a new accounting model.
Who is affected by IFRS 16?
This measure will only apply to companies that are required to file consolidated statements or belong to a group reporting under international standards. Consequently, national companies not subject to international accounting standards are excluded from this accounting obligation.
What is the new standard?
Under IFRS 16, the distinction between operating leases and finance leases disappears. Lessees shall recognize all rentals on the balance sheet as if they were financed purchases and shall be recognised in the asset for the right of use and in the liability for the lease. Exceptions are given for short-term leases, i. e. when the lease period under the new standard is 12 months or less and leases of low-value assets, i. e. assets with a maximum value of USD 5,000 when new. The amortization of the right to use the asset and the interest expense on the lease liability (finance charge) shall be recognised in the income statement.
On the contrary, there are virtually no changes in the accounting of lessors, who will continue with a dual model similar to that of the current standard. They will also continue to perform a classification test to distinguish between financial and operating leases.
What impact will IFRS 16 have on companies?
By including operating leases in the balance sheet, it will appear that companies have more assets, but are also more indebted. In addition, the presentation of expenses in the income statement and cash flows in the statement of cash flows will change, mainly because of the cash payments of the principal of the liability and the interest on the lease liability.
Do you have questions?
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CINC Asesoría de Empresas