On the first of January 2019, new accounting regulations will commence that will cause some important changes to business finances, decision-making and financial reports of profitability. For all international businesses, the IFRS or International Reporting Standard 16 will as of this date, replace the IAS or International Accounting Standard 17 accounting model that is currently in place.
Under the new IFRS 16 rules, anything that acts or even looks like a lease or that may encompass an ‘embedded’ lease will be included in the new policy guidelines. The term ‘lease’ in this instance will refer to any form of real estate, personal property, machinery or even equipment. When it comes to residential or commercial property, this will have a massive effect as the majority of leases will be brought onto the balance sheet as an asset or liability.
As a result, leases will be capitalised based on who controls the right to use the asset. This could mean that certain leases will turn into service agreements to escape them being capitalised, however, a separate entity must have control over the right to use the asset. Therefore, lease advisors have commented that serviced offices or collaborative workspaces could potentially receive a sizeable boost from the new ruling.
Included in the up and coming IFRS 16 will be rental costs as well as any fixed or predicted increases. Any service charges or ancillary costs will typically be excluded wherever they are to be charged based on actual cost – depending on what that is. Where a deal is agreed with a cap on service charges, and where the cap level is likely to be lower than the landlord’s cost, the service charge would be treated as rent and capitalised.
The new changes have also sparked questions over whether mandated costs such as property tax (commonly known as business rates) because they typically included the rents internationally, however, in certain countries including the UK, they are required to be paid by the tenant to a third party ie. The local governing body.
IFRS 16 Changes: What Should I Know?
- As of January 1st, 2019, all leases of 1 year or more will be placed on the balance sheet, both as an asset (right to use property) and as a liability (obligation to pay for that use).
- For accounting with year-ends in 2018, they will need an estimate of the effect of accounting changes.
- All 2017 accounts must show an impact assessment of the potential changes.
- Current rents value will depreciate over the term in a straight line, with interest being given to the undepreciated liability.
- Longer term leases could suffer; however, a balanced portfolio of values and expiry dates will not have an overly punishing effect.
- The way in which revenues are recognized will change for sale and leaseback transactions. Ie. profits from the sale will be captured on the balance sheet and depreciated over the lease term via the profit and loss statement.
It is vital that you begin to prepare for the IFRS 16 by reviewing your current leases to analyse the impact these changes will have on your accounting measures. Therefore, if you would like more information on the approaching changes, please don’t hesitate to get in touch with our lease advisory team.