IFRS 16 Whitepaper

How IFRS16 will affect your business

 

On 13 January 2016 the International Accounting Standards Board (IASB) published new accounting standards for leases. These new rules, better known as IFRS16 - impose some significant changes.

According to the new standards, “lessees” will no longer enter operating leases in their income statements as before. In future they will, rather, both capitalise their “right of use” (equivalent to the net present value of their future minimum lease payments) and report a corresponding liability on their balance sheets.

What effects will IFRS16 have on your business?

Impenetrably complex financial structures in which important capital resources and business assets do not appear on the balance sheet have long been a source of problems for international regulatory authorities (IASB, FASB, SEC). The 2016 IFRS were therefore established in the interest of greater transparency. These standards make it easier to obtain a complete picture of a business enterprise’s assets and liabilities and prevent the misuse of operating leases to hide such expensive assets as aircraft or buildings.

To whom does this change apply?
All enterprises that prepare their financial reporting in accordance with IFRS, including in particular:

  • exchange-listed companies and their subsidiaries in Europe
  • companies that are registered in one of the countries that have adopted the IFRS standards


What consequences are to be expected?
Lessees need to recognise on their balance sheets the “value in use” and a liability on the basis of the contractual details provided by the lessor. The operational benefits of an operating lease are, however, retained:

  • Effective and simple source of financing
  • Improved cash flow
  • Predictable monthly payments
  • Outsourcing of processes that are only incidental to core business activities (fleet management, maintenance, assistance, accident management, fuel management, etc.)
  • Elimination of the risks associated with the asset or its disposal
  • Flexible use
     

You will find more details about the consequences in the Arval white paper “How IFRS16 will affect your business” (PDF).

What are your next steps?

There are two important dates that businesses should take note of in connection with the new directive:

  • The accounting standards go into effect on 1 January 2019 (subject to approval by the European Community).
  • Businesses that apply IFRS15 “Revenue from Contracts with Customers” may use the new standards as early as 1 January 2018.
     

What can you expect from Arval?
With Arval by your side you are perfectly prepared for the changeover to IFRS16. From the very beginning we have pro-actively taken part in the discussions with industry associations and audit firms, and we are making every effort to offer you the simplest and best possible financial reporting solutions. We regard it as our duty to spare you as much work as possible and to provide you in a timely fashion with the information you need in order to apply the new standards. Should you have further questions, please feel free to consult your account manager or request the Arval white paper “How IFRS16 will affect your business” (PDF).

Arval also recommends that lessees settle with their auditors as quickly as possible on the method to be applied for posting leasing liabilities and rights of use.

Glossary

IASB

The International Accounting Standards Board (IASB) is an independent group consisting of 14 experts that possesses the requisite practical experience in establishing accounting standards for the preparation, auditing and use of financial reports as well as in advanced training in accounting. The members of the IASB are responsible for developing and publishing the IFRS.

IFRS

The International Financial Reporting Standards (IFRS) are a collection of rules for accounting that is developed and perpetuated by the IASB. They can be applied anywhere in the world – in developed, emerging and developing countries alike – enabling investors and other users of financial disclosures to compare directly the financial position of listed companies on an international level. Application of the IFRS is now required in more than 100 countries, including the European Union and in more than two thirds of the G20 countries. The G20 countries and other international organisations have consistently supported the work of the IASB and its mission to create worldwide accounting standards.

FASB

The Financial Accounting Standards Board (FASB) is a private, not-for-profit market-regulating organisation whose main purpose is to establish and improve in the public interest the Generally Accepted Accounting Principles (GAAP) in the United States.

SEC

The U.S. Securities and Exchange Commission (SEC) is an agency of the United States Federal Government. Its primary responsibilities are enforcing the federal securities laws and proposing securities rules as well as regulating the securities industry, the nation’s stock and options exchanges, and other activities and organizations, including the electronic securities markets in the United States.