IFRS 16
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 will remove 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 are currently 'off balance sheet' under IAS 17.
IFRS 16 will lead to increased transparency and improved comparability between companies that lease and companies that borrow to buy assets. However, for many companies IFRS 16 will result in a material 'grossing-up' restatement of their balance sheets.
This 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.
IFRS 16 is issued by the International Accounting Standards Board.
