With little over four months before the 2019 yearend, small businesses should start preparing for the new accounting standard on leases, IFRS 16. So, why is IFRS 16 relevant, what are its requirements and what needs to be done by small businesses? Let's read further.
Why is IFRS 16 relevant?
Leasing of assets is a very common business activity undertaken by businesses of all sizes
Key financial figures and ratios will change and owners, lenders will require more information. For instance, certain loan covenants with lenders may be breached without any change in the underlying fundamental aspects of the business.
Key requirements of IFRS 16
All leases are required to be accounted on lessee's balance sheet. Previously, only finance leases were accounted. Some exemptions given for low value assets and short term leases.
Right of use asset with a corresponding liability will be recognised resulting in a significant change in the entity's balance sheet totals.
P&L will include depreciation of right of use asset. Previously, depreciation was recorded on finance lease assets over the shorter of lease term or economic life of the asset.
What are small businesses required to do?
Make a comprehensive list of lease contracts. Some of the information relating to lease term and lease payments will be readily available while others require careful coordination with the relevant business units.
Review current lease contracts to see if they qualify for short term exemption or low value leases.
Determine the information required to calculate the value of asset and corresponding liability. Some of the critical inputs required are discount rate, lease vs non-lease components, lease period (cancellable vs non-cancellable).
The adoption of IFRS 16 could have a significant impact on lessees, both accounting and business related. The key is to prepare early so that the transition to the new standard can be smooth and less disruptive to the small businesses.