IFRS 16: Difference between revisions
imported>Doug Williamson (Link with ASU 2016-02 Leases (Topic 842)) |
(Explain front end loading.) |
||
| (17 intermediate revisions by 2 users not shown) | |||
| Line 1: | Line 1: | ||
International Financial Reporting Standard 16, dealing with leases. | International Financial Reporting Standard 16, dealing with leases. | ||
IFRS 16 | IFRS 16 replaced IAS 17: Leases. | ||
IFRS 16 | IFRS 16 became 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'. | IFRS 16 requires most lease liabilities to be accounted for 'on balance sheet'. | ||
This change | This change removes the former distinction between [[operating lease]]s and [[finance lease]]s. | ||
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. | 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 | 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 | 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 | 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 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. | 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, rather than being spread equally over each time period. | |||
| Line 28: | Line 30: | ||
EBITDA and the interest cover ratio are also likely to be impacted. | EBITDA and the interest cover ratio are also likely to be impacted. | ||
==See also== | ==See also== | ||
*[[ASU 2016-02 Leases (Topic 842)]] | *[[ASU 2016-02 Leases (Topic 842)]] | ||
*[[Debt]] | *[[Debt]] | ||
*[[DIA]] | |||
*[[EBITDA]] | *[[EBITDA]] | ||
*[[Finance lease]] | |||
*[[Frozen GAAP]] | *[[Frozen GAAP]] | ||
*[[Gross up]] | |||
*[[Hire purchase]] | |||
*[[IAS 17]] | |||
*[[Incremental borrowing rate]] | |||
*[[Interest cover]] | *[[Interest cover]] | ||
*[[ | *[[Interest rate implicit in a lease]] | ||
*[[Lease]] | |||
*[[Operating lease]] | |||
*[[Off balance sheet]] | *[[Off balance sheet]] | ||
*[[ | *[[Residual value]] | ||
*[[ | *[[Right of Use]] | ||
*[[ | |||
*[ | |||
==Other resources== | |||
*[https://www.treasurers.org/thetreasurer/definitive-guide-to-deriving-ifrs-16-discount-rates Definitive guide to deriving IFRS 16 discount rates: The Treasurer] | |||
*[https://www.iasplus.com/en/standards/ifrs/ifrs-16 IFRS 16 - IAS Plus] | |||
*[https://www.ifrs.org/content/dam/ifrs/publications/pdf-standards/english/2022/issued/part-a/ifrs-16-leases.pdf?bypass=on IFRS 16 full text] | |||
[[Category:Accounting,_tax_and_regulation]] | |||
[[Category:Compliance_and_audit]] | |||
Latest revision as of 10:46, 5 October 2023
International Financial Reporting Standard 16, dealing with leases.
IFRS 16 replaced IAS 17: Leases.
IFRS 16 became 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, rather than being spread equally over each time period.
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
- ASU 2016-02 Leases (Topic 842)
- Debt
- DIA
- EBITDA
- Finance lease
- Frozen GAAP
- Gross up
- Hire purchase
- IAS 17
- Incremental borrowing rate
- Interest cover
- Interest rate implicit in a lease
- Lease
- Operating lease
- Off balance sheet
- Residual value
- Right of Use
