Date posted: 16/09/2019 5 min read

IFRS 16 on track for a new lease of life

The new standard on leases, IFRS 16, will impact your business – but do you know how? Aletta Boshoff, National Leader, IFRS Advisory and Partner at BDO delves deeper.

In brief

  • The new leasing standard IFRS 16 took effect on 1 January 2019.
  • Entities need to consider a wide range of issues, from how their accounting system will handle the changes to tax impacts.
  • Transition to IFRS 16 may even give rise to potential tax planning issues.

Aletta Boshoff, National Leader, IFRS Advisory and Partner at BDO, says the effects of adopting the new leasing standard, IFRS 16, Leases, should be considered now so that entities can take any remedial action and deal with any potential planning issues.

Under the standard, the off-balance sheet benefits of leasing will be all but eliminated. "The International Accounting Standards Board (IASB) has fundamentally changed the financial reporting landscape for how lessees account for operating leases, with the introduction of IFRS 16 Leases," Boshoff notes.

"The new standard effectively removes the operating leases classification, and requires all lessees to show a lease liability and a corresponding right-of-use asset for all leases."
Aletta Boshoff, Partner, BDO

Entities need to consider how to prepare their financial statements using this new accounting standard. The changes can be complex and can have effects beyond just the accounting.

"When adopting IFRS 16, including deciding which transition route to apply, members need to consider the commercial and practical impacts of the changes in accounting," Boshoff says. "The choices you make will affect the way the performance of your business is measured and reported, and it is vital to consider not only the commercial and practical issues, but also any tax impact of these changes."

As a guide, Boshoff recommends addressing some key issues, including how the entity's ability to declare dividends will be affected, whether bank covenants will be affected, and how financial results (profit before tax) and financial position (liabilities) will be impacted.

On a practical level, entities need to consider which processes and systems will need changing to accommodate IFRS 16. "Is there a technology solution to implement at the date of adoption and for ongoing lease management, and will staff training be required – let alone training for finance teams and executives and directors?" Boshoff asks.

In addition, Boshoff says members should ask which wider business planning activities will be affected and how current agreements will be affected.

In transitioning to IFRS 16, members need to weigh up a variety of commercial considerations. As a guide, Boshoff says there could be consequences associated with reported earnings and balance sheet presentation – as well as consequences for management accounts, forecasts and strategies.

"Agreements that are based on profit, EBIT or EBITDA such as debt covenants, management agreements, remuneration and share-based payment schemes could also feel the impact," she adds.

Checklist of complex issues

Boshoff has identified just a few of the areas in which complex issues will typically arise with the adoption of IFRS 16. These include:

  • identifying which assets are held by way of a lease
  • determining whether an arrangement meets the definition of a "lease" in IFRS 16
  • deciding the appropriate lease term, including option periods, when calculating the value of the right-of-use asset
  • identifying the potential impacts of adopting IFRS 16.

"Any changes to accounting policies may have an impact on a company's cash tax, income tax expense, and deferred tax in the year of change and over future years," cautions Boshoff.

In addition, certain tax provisions (such as thin capitalisation and the taxation of financial arrangements provisions) rely on accounting standards for their application. "The adoption of IFRS 16 may impact how leases will be structured and accounted for and may give rise to potential tax planning issues," Boshoff notes.

To achieve the best outcome, Boshoff says entities should be considering a range of issues such as the effect on cash tax of choosing one lease arrangement over others, and how to manage tax charges or maximise reliefs due to one-off transitional adjustments.

"It is also necessary to identify transaction types that may cause issues in determining an entity's taxable profit," cautions Boshoff. "In particular, taxpayers subject to the thin capitalisation provisions will need to understand the effect of the provisions in their maximum allowable debt calculation."

Get to know IFRS 16 Leases

Aletta Boshoff will be speaking at Australian Accounting Conference 2020.

Find out more