By LeaseCrunch® on September 29, 2021 at 9:00 AM
IFRS 16 is the most significant change to lease accounting in the past 30 years, so you’d better buckle in and listen up.
IFRS, or The International Financial Reporting Standards Foundation, created the IFRS 16 standard for lease accounting, which came into effect on January 1, 2019. It replaced the existing IAS 17 accounting standard and was introduced by the International Accounting Standards Board (IASB).
IAS 17 classified leases into two types: a finance lease and an operating lease. A lease was classified as a finance lease if the agreement between the two parties transferred the gains and liabilities associated with ownership to the lessee. All other leases were classified as operating leases.
Under IFRS 16, leases are identified under a “right-of-use” model. If the company has control over that which they are renting, then they must display it on the company balance sheet. Beforehand, many companies didn’t have to document leases on their balance sheets because they could classify them as operating leases and effectively write them off as operational expenses, thereby avoiding the headache of lease accounting.
So What Does IFRS Do?
The objective of IFRS 16 is to report information that properly and clearly represents lease transactions and provides a basis for users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. This accounting standard introduces a single lessee accounting model, whereas the IAS 17 bicameral model had two separate ways to classify a lease.
IFRS 16 is one of several attempts to clarify lease accounting to the benefit of investors and interested parties and to make sure that information for leased items is documented the same way for the utmost financial transparency. Both ASC 842 and GASB 87 are new accounting standards that seek to increase the stringency around how leases are represented on balance sheets so investors and other financially-interested parties have the full picture of their investments’ (or potential investments’) financial standing.
What is IFRS 16 Compliance?
In order to meet the requirements of IFRS 16, lessees recognize assets and liabilities that arise from a lease. Since IFRS introduced a single lessee accounting model, all lessees must recognize assets and liabilities for all leases with a term of more than 12 months, unless the underlying asset is of a very low value. Specifically, a lessee must recognize its right to use an underlying leased asset as well as any lease liability that represents its obligation to make the lease payments.
Long story short, a lease under IFRS 16 is the identified asset plus the control over use. As much as the new right-of-use model implemented by IFRS 16 helps the clarity of financial documentation, it also makes it much more difficult to do lease accounting.
Who Does IFRS 16 Apply To?
These changes apply to organizations that are already using the reporting method of the IFRS, so international companies or public limited companies (PLCs). Public limited companies are the UK equivalent of a US corporation or Inc.
Because IFRS 16 has such a low bar for what classifies as a lease, determining the balance sheets of these big companies can be a big lift. Here you can read about several reasons why public companies should not be using spreadsheets for their lease accounting. Fortunately, lease accounting software exists to do calculations in a few seconds that would take accountants a few hours or more.
What is the Simplified Approach to IFRS 16?
The simplified approach to IFRS 16 involves LeaseCrunch’s lease accounting software. With the necessary increased due diligence in lease documentation in accounting comes increased error and time expenditure for your company. Get all of your lease accounting done quickly and accurately with our easy-to-use software that provides you with:
- Efficiency: Manual calculations take time, especially with the more intricate lease accounting standards introduced by IFRS 16. Software can crunch numbers with speed and accuracy and save you money and time.
- Ease of use: Software should simplify implementing the new IFRS 16 standard, not make it more confusing. Look for lease accounting technology that has a user-friendly interface for ease of use and is able to integrate into your existing tech stack.
- Customization and control: Look for a software that scales to your business and is configurable to the features and functions you want.
- Security: Choosing a software solution that is secure is just as important as choosing one that is fast and accurate.
- Expertise: Make sure to select software created by accounting experts, not just software engineers. Here at LeaseCrunch, we specialize in software solutions to ease the burden of lease accounting on your firm.
Is IFRS 16 mandatory?
IFRS 16 is mandatory for all companies within its scope, so mainly international companies or public limited companies.
Is IFRS 16 applicable to SME?
SMEs, or small and medium-sized enterprises, are businesses with a certain amount of revenue, assets, and employees. They represent 99% of all businesses in the EU. IFRS for SMEs is only updated periodically, and thus far a proposal was submitted in May of 2019 in the hopes of matching IFRS for SMEs to reflect the new IFRS 16 lease accounting standard, but it has yet to be approved and go into effect.