Deferred income and IFRS 16: Difference between pages

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''Financial reporting - balance sheet - liabilities''.  
International Financial Reporting Standard 16, dealing with leases.


Income for which payment has been received by the business, but which has not yet been earned.
IFRS 16 replaces IAS 17: Leases.


IFRS 16 is mandatory - for companies reporting under international financial reporting standards - from 1 January 2019.


<span style="color:#4B0082">'''''Example: Five-year licence'''''</span>


Our accounting year runs from 1 January to 31 December.
IFRS 16 requires most lease liabilities to be accounted for 'on balance sheet'.


One of our customers has paid us in advance, at the start of January for a five-year licence.
This change removes the former distinction between [[operating lease]]s and [[finance lease]]s.


We recognise the revenue in our income statement spread over the full five years.


At the end of the first year 4/5 of the total received from the customer is Deferred income.
Broadly speaking, IFRS 16 requires all leases to be recognised on the balance sheet, other than short term leases or those for low value assets.  


We have a liability / obligation to provide a further four years of service, for which we have already been paid in advance.
The leases to be brought 'on balance sheet' under IFRS 16 include most operating leases that were 'off balance sheet' under IAS 17.


IFRS 16 leads to increased transparency and improved comparability between companies that lease and companies that borrow to buy assets.


Deferred income is recorded as a credit balance in the balance sheet. 


(The related accounting entries for the initial receipt being DEBIT Cash and CREDIT Deferred income.)
However, for many companies IFRS 16 results in material restatements of their balance sheets and - to a lesser extent - income statements.


The main balance sheet impact is to 'gross up' both assets and liabilities by the capital amounts of the leases.


Deferred income is a liability of the reporting entity to provide the services that the customer has already paid for.
The main income statement impact is to recognise a greater proportion of total costs in the earlier years of the lease. In other words, cost recognition is 'front-end loaded' under IFRS 16.




For reporting presentation purposes it is often aggregated with Accruals, as 'Accruals and deferred income'.
These restatements will normally impact any financial covenant ratios that include ‘debt’, ‘net worth’ or similar indicators, subject to any 'frozen GAAP' provisions.  


EBITDA and the interest cover ratio are also likely to be impacted.


== See also ==
 
* [[Accrual]]
==See also==
* [[Accruals accounting]]
*[[ASU 2016-02 Leases (Topic 842)]]
* [[Accrued expense]]
*[[Debt]]
* [[Accrued income]]
*[[DIA]]
* [[Balance sheet]]
*[[EBITDA]]
* [[Credit]]
*[[Finance lease]]
* [[Debit]]
*[[Frozen GAAP]]
* [[Financial reporting]]
*[[IAS 17]]
* [[Income statement]]
*[[Incremental borrowing rate]]
* [[Liabilities]]
*[[Interest cover]]
* [[Prepayment]]
*[[Interest rate implicit in a lease]]
* [[Reporting entity]]
*[[Lease]]
* [[Revenue]]
*[[Operating lease]]
*[[Off balance sheet]]
*[[Residual value]]
*[[Right of Use]]
 
 
==Other links==
[https://www.treasurers.org/thetreasurer/definitive-guide-to-deriving-ifrs-16-discount-rates Definitive guide to deriving IFRS 16 discount rates: The Treasurer]


[[Category:Accounting,_tax_and_regulation]]
[[Category:Accounting,_tax_and_regulation]]
[[Category:Compliance_and_audit]]

Revision as of 08:57, 22 October 2020

International Financial Reporting Standard 16, dealing with leases.

IFRS 16 replaces IAS 17: Leases.

IFRS 16 is mandatory - for companies reporting under international financial reporting standards - from 1 January 2019.


IFRS 16 requires most lease liabilities to be accounted for 'on balance sheet'.

This change removes the former distinction between operating leases and finance leases.


Broadly speaking, IFRS 16 requires all leases to be recognised on the balance sheet, other than short term leases or those for low value assets.

The leases to be brought 'on balance sheet' under IFRS 16 include most operating leases that were 'off balance sheet' under IAS 17.

IFRS 16 leads to increased transparency and improved comparability between companies that lease and companies that borrow to buy assets.


However, for many companies IFRS 16 results in material restatements of their balance sheets and - to a lesser extent - income statements.

The main balance sheet impact is to 'gross up' both assets and liabilities by the capital amounts of the leases.

The main income statement impact is to recognise a greater proportion of total costs in the earlier years of the lease. In other words, cost recognition is 'front-end loaded' under IFRS 16.


These restatements will normally impact any financial covenant ratios that include ‘debt’, ‘net worth’ or similar indicators, subject to any 'frozen GAAP' provisions.

EBITDA and the interest cover ratio are also likely to be impacted.


See also


Other links

Definitive guide to deriving IFRS 16 discount rates: The Treasurer