IFRS 16 Background

When is IFRS 16 Leases effective?

• Effective for accounting periods beginning on or after 1 January 2019
• Replaces IAS 17 Leases

What are the requirements of IAS 17?

• Requires a lessee to classify leases into finance and operating leases
• Operating lease accounting requires the lessee to recognise only rental expense in the income statement and no asset or liability even though there is a right-to-use asset and obligation to pay rentals
• This leads to a misleading impression of the lessee’s leverage and assets in use

How does IFRS 16 differ from IAS 17?

• IFRS 16 has introduced a single lease accounting model where all leases (except short-term leases and assets of low value) require recognition of the right-of-use asset and lease liability
• For operating leases, a depreciation or amortisation charge and finance cost is recognised instead of rental expense in the income statement
• This increases EBITDA
• In the cash flow statement, under IAS 17, the entire rental expense would have been recognised as cash outflows from operating activities. Since the same cash payment is attributed to interest and liability repayment in IFRS 16, there is an increase in net cash flows from operating activities and a decrease in net cash flows from financing activities

What is the impact of transition to IFRS 16 Leases?

The transition to IFRS 16 has an impact on:

1. Financial Ratios
2. Performance Metrics - gearing, EBITDA, net income, earnings per share, return on capital employed, return on equity and operating and financing cash flows

What are the two approaches for transition to IFRS 16?

1. Modified Retrospective Approach - Requires the cumulative effect of initial application to be recognised in retained earnings at the date of initial application with no restatement of comparatives
2. Full Retrospective Approach - Requires restatement of the comparatives