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.
- ASU 2016-02 Leases (Topic 842)
- Finance lease
- Frozen GAAP
- Hire purchase
- IAS 17
- Incremental borrowing rate
- Interest cover
- Interest rate implicit in a lease
- Operating lease
- Off balance sheet
- Residual value
- Right of Use