After protracted discussions the international standard setter published a new standard regarding lease accounting. The new leasing standard IFRS 16 enter into force 01.01.2019 and will replace the 20 years old standard IAS 17.
Until now companies were not obliged, in case of leasing, to disclose the payment obligation within the balance sheet. They can decide by oneself if the leasing will be treated as a financial leasing or as an operational leasing. Financial leasing resembles a leveraged acquisition and must be disclosed within the balance sheet. Whereas an operational leasing have the character of a rent and must therefore not be included in it. A reference in the appendix would be sufficient.
So starting from 01.01.2019 the option of free choice of „leasing definition“ drop out for companies which act as lessees. The new standard is not applicable to lessors as well as for „Short-Term-Leases“ (duration < 12 months) and „Small-Ticket-Leases“ (purchasing price < 5.000 US-Dollar).
The aim of this new accounting standard should be to avoid that companies use this possibility to hide large sum of liabilities within their balance sheet.
This modification means concretely for companies and their financial departments that they have to review and revaluate existing leasing contracts. Especially the review of operational leasing require great effort to register and document data. A modification of relevant performance indicators will be another result of IFRS 16. The equity ratio will decrease while the dept and the interest burden will increase.
The R.S.V.P. Management Solutions GmbH supports you with individually consulting services regarding this topic. Thanks to specific software tools we are able to support the implementation of IFRS 16 also IT technically.