Graham Ellis
Partner
Why you should work with us on IFRS 16 Leases
IFRS 16 Leases may have a significant impact on balance sheet and results, especially EBITDA. It may also affect agreements such as earn-outs, bonus agreements and bank covenants that are linked to reported numbers. These agreements may need to be reviewed and amended as a result.
Complying with IFRS 16 may also require changes to systems and processes in order to obtain the information needed for accounting and disclosure requirements.
Our expert team will help you understand and prepare for the changes that will take place with IFRS 16. We will carry out a robust and independent impact assessment. We want you to be confident you are taking all the necessary steps and that your business is ready for IFRS 16.
We can also provide advice and guidance on any aspects of IFRS 16 that may be of particular concern.
Please get in touch to discuss how we can help.
For further details of how BDO can help, visit our financial reporting solutions page.
IFRS 16 Leases information and guidance
BDO has prepared a range of useful information and guidance to assist you and your business to manage IFRS 16 and its implications.
Key facts
IFRS 16 Leases replaces IAS 17, SIC 15, SIC 27 and IFRIC 4 and sets out the principles for the recognition, measurement, presentation and disclosure of leases by lessors and lessees. It is applicable for accounting periods beginning 1 January 2019 but early application is permitted, provided that IFRS 15 Revenue from Contracts with Customers is also applied. IFRS 16 has been endorsed for use by those entities applying EU IFRS.
Impact on lessees
IFRS 16 removes the current classification of leases between operating and finance leases for lessees. Instead, lessees will bring all leases within the scope of IFRS 16 (other than those for which the short term or low value exemptions have been taken) on balance sheet, showing an asset for the right of use and a liability for the discounted amount of future payments.
For existing operating leases, the single amount currently included within operating results as lease costs in profit or loss would be split into operating and finance components. This will result in a front loaded expense profile compared to the straight line expense profile associated in the past.
Whilst total cash flows will remain unchanged, there will be a change in analysis within the cash flow statement as principal repayments will be included in financing cash flows and interest payments may be included in operating or financing cash flows, whereas under IAS 17 operating lease cash flows are included entirely in operating cash flows.
Impact on lessors
IFRS 16 substantially carries forward the lessor accounting requirements in IAS 17. A lessor continues to classify its leases as operating leases or finance leases, and to account for those two types of leases differently.
UK tax
Over the last couple of years, HMRC has published a number of consultations on the way forward for the post-IFRS 16 tax environment for lessees, and now draft clauses intended for the 2018-19 Finance Bill. It is proposed that any new legislation would take effect for accounting periods commencing on or after 1 January 2019. The key new proposal is that the Government intends to abolish the 'frozen GAAP' provision in section 53 Finance Act 2011, so tax could then take into account the change in lease accounting standards. This would mean there is no requirement for all lessees to maintain two sets of books - one for accounts, another for tax – although there will of course continue to be tax adjustments to be made to accounts figures when preparing lessee tax computations eg rental restrictions for long funding leases.
Any transitional accounting adjustment on adopting IFRS 16 is required to be spread (for tax purposes) over the mean remaining lives of the leases giving rise to the adjustment. The law will be amended to ensure that this is equally the case for early adopters. Whether the transitional adjustment is material may depend upon the accounting option chosen and whether there is an existing onerous lease provision to be unwound. The deferred tax accounting for this may be complex, particularly if different accounting standards are applied to solus accounts and consolidated accounts.
For existing long funding operating leases of plant and machinery, the intention is that these would be grandfathered, such that there would be no rebasing for capital allowance purposes. New long funding leases would be deemed to be finance leases (for tax purposes).
Furthermore, the IFRS 16 change may impact tax deductibility under the new corporate interest restriction (‘CIR’) regime and groups may wish to model the combined impact of the different options. In summary, when preparing their CIR calculations, taxpayers adopting IFRS would be expected to determine whether hypothetically the lease would have been an operating lease under existing GAAP. If so, the rental would not count as finance expense for this purpose, but equally EBITDA would be correspondingly lower. This is designed to ensure a level playing field between businesses operating under UK GAAP or IFRS.
Amendments to IFRS 16
In May 2020, the IASB issued amendments to IFRS 16, which provide relief for lessees in accounting for rent concessions granted as a direct consequence of COVID-19. This amendment is subject to EU endorsement.
Details of the amendments, which are effective immediately, are summarised in our publication IFRB 2020/08 and a copy of the amendments can be found on the IASB's website.
Our publication IFRB 2020/11 answers dozens of questions that lessees have been asking with regards to the recent amendments to IFRS 16: COVID-19 related rent concessions. The Bulletin answers how to assess whether a lessee may apply the practical expedient, how the underlying calculations should be done, along with numerous illustrative examples of common rent concessions.
IFRS 16 publications
- IFRS at a Glance – IFRS 16 Leases
A short ‘key facts’ document, setting out the key requirements for both lessees and lessors under IFRS 16, the key application guidance, key definitions and disclosures
- IFRS in Practice 2019/20: IFRS 16 Leases
This guidance looks at the scope of IFRS 16 and the required accounting for both lessees and lessors in detail, and the impact of IFRS 16 in practice, including a number of examples
Videos which explore various aspects of IFRSs are available to view on the BDO IFRS YouTube channel.
