Reporting your IFRS 16 compliance in your Financial Statements
There are plenty of bodies, boards, institutions and councils offering guidance on how you should present your accounts and financial reports.
More particularly in recent years, you may well have had to explain how you have tackled the issues of coming into line with the new accounting standards issued by IASB and FASB – most recently IFRS 9 & IFRS 15. This year many companies will need to wrestle with transition to and continuing compliance with IFRS 16. Coupled with this is just how as a business you document the judgements taken and consequential effects of compliance with the new accounting standards.
The Financial Reporting Council (FRC) have in November found it necessary to offer just such guidance on how to “expand discussion of new leasing standard in annual reports and account”.
The background to all this is of course that IFRS 16 became effective 1st January 2019 and essentially –
- Replaces IAS 17 ‘lease’, IFRIC 4, SIC 15 and SIC 27
- Operating leases are now recognised on balance sheets and companies with a high number of operating leases or with high value operating leases will see a significant increase in assets and associated liabilities.
- Operating lease expense on income statements will be replaced by depreciation of ROU assets together with interest expense on lease liabilities – this can have a significant effect upon levels of operating profit and finance expenses.
- Stakeholders, investors and lenders may be unaware of the potential impact on the next financial statements.
In reviewing the interim reports of 20 companies applying International Financial Reporting Standard 16 (IFRS) ‘Leases’ for the first time, the FRC felt that the financial statements needed to provide more information on its effects and as required by IFRS provide more information in their annual reports and accounts to help stakeholders better understand the effect of the new standard with particular regard also to some of the better practices they saw which tended to be those disclosures that were tailored to the company’s circumstances and provided more than the minimum requirements. These included:
- information about key accounting judgments made; for example, on the identification of lease, or on assessing their length;
- clearer explanations of the specific transition choices made; exemptions taken, and options exercised – discount rate applied, fully retrospective or modified retrospective approach, short term leases and low value assets
- a detailed reconciliation between the operating lease commitment under the previous standard and the new lease liability, with clear explanations for reconciling items; and
- where companies use alternative performance measures to help users of the accounts to understand the effect, these measures should be properly labelled, reconciled and explained, and not give more prominence than the IFRS measures.
Additionally, it might serve stakeholders, potential investors and lenders well to discuss the use of leasing going forward as an acquisition tool and how compliance has affected that decision and the ease or otherwise, dependent on the solution or tools adopted, of continued compliance.
Able to cater for all the exemptions, options, modelling and updates regarding IFRS 16, Innervision has just such a software solution – easy to implement, secure to use, robust, referenceable and proven and most importantly available now – LOIS Lease Accounting LLA.
Disclaimer: this article contains general information about the new lease accounting standards only and should NOT be viewed in any way as professional advice or service. The Publisher will not be responsible for any losses or damages of any kind incurred by the reader whether directly or indirectly arising from the use of the information found within this article.