IFRS 16…is coming to town!

in Regulatory/Compliance, 12.12.2019

Still recovering from IFRS 15 and IFRS 9 implementation for 2018 year-end financial statements? Well, don’t relax just yet…It’s time to gear up for the latest challenge: IFRS 16.

In its first mandatory year following ESMA’s annual statement on enforcement priorities in October, here’s what you need to know:

Lease term

Issuers are expected to provide sufficient disclosure on judgments made in determining the lease term, especially when the lease contract does not include specific terms on the termination, cancellation or renewal of the lease.

For info on lease term and useful life of non-removable leasehold improvements, check out the IFRC IC’s recently published agenda decision.

Discount rate

According to IFRS 16, an incremental borrowing rate should be used to discount lease payments if the interest rate implicit in the lease cannot be readily determined. Well that’s certainly easier said than done! Some issuers still seem to be struggling with how to determine the incremental borrowing rate…

If you’re one of them, then don’t miss this IFRS IC discussion on the topic.

Presentation…

IFRS 16 brings changes in the presentation of both primary financial statements and cash flow statements. Issuers should pay close attention to where they present:

  • right-of-use assets and lease liability
  • interest expenses and depreciation charges
  • cash payments for the principal
  • interest portion of the lease liability

 …and disclosures

Entity-specific is a must for relevant disclosures! Lessees should provide disclosures to enable users to assess the effect that leases have on their financial performance, cash flow and financial position. Not only quantitative, but qualitative disclosures are essential especially when it comes to significant judgments and assumptions made when applying IFRS 16. Do watch out here for determination of lease term and discount rate!.

Impairment of right-of-use assets

IAS 36 must be applied in determining if the right-of-use asset is impaired. The impairment test (methodologies, inputs and assumptions), however, should be tailored to take into account the specificities of lease accounting when calculating the cash flow to determine the recoverable amount.

Transition

Issuers can choose to apply IFRS 16 retrospectively to each prior reporting period presented or to opt for the modified retrospective approach.

Remember that the modified approach offers several practical expedients for the lessee which must be disclosed together with the chosen transition approach.

Are you ready to roll?

You lucky ones who didn’t have to prepare half-year reports now need to get a move on…Don’t procrastinate…Act now!

For more tips on IFRS 16 application, visit our blog for the latest IFRS news and keep an eye on ongoing discussions at the IFRS IC.


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