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IFRS 16 and the major impact it will have on your capital requirements

Mark Hirst

Do you use IFRS for the preparation of your financial statement? If so, have you considered the impact of IFRS 16 on your capital requirements?
It’s been a long, long wait, but we finally have the international standard dealing with leases, IFRS 16. With effect from 1 January 2019, companies will need to bring their operating leases onto their balance sheet.

Key issues
While there is over a year to go before implementation, you should assess what effect IFRS 16 will have on your financial statements now. Many firms will see major changes to their balance sheets, and some change to their reported profits. With no word of any transitional provisions you can expect to have to allocate 8% of the total value of your leases as additional capital under credit risk.
Where you have loans with covenants, you will also need to consider the effect that the changes will have on compliance with those covenants. Where breaches of covenants are likely, or reasonably possible, talking to lenders before the change hits accounts will be crucial.

Short lease exemptions
An asset and liability need not be recorded in respect of short leases, those of less than a year. To avoid this being used too widely, there are provisions covering leases with variable terms which may last for more than a year. So very short term leases will be excluded, but those with extension clauses will have to be considered in great detail. Assessing asset life is normally very straightforward – it will be the lease period – but where this period is not clear then the lease terms will need to be closely considered.

What next?
  1. analyse your current and future leases in respect of the impact they will have on your balance sheet;
  2. calculate the change in capital requirements this is likely to cause; and
  3. begin preparation of transitional disclosures; and
  4. consider additional resources, e.g. time and staff, required to prepare the financial statements for the first year applying IFRS 16.
How we can help
This summary does not cover all the changes required under the new standard, but we are happy to help provide further guidance on the overall impact to your financial statement and how this change may impact your capital requirements going forward. Please do not hesitate to get in touch if you require any assistance.