Warnings Over New Accounting Rules

6 Jul, 2016

Property groups and other companies are being warned to gain a thorough understanding of the new International Financial Reporting Standard 16 Leases (“IFRS 16”) rules, which will become effect in 2019. These rules will change how, when and at which magnitude expenses are recognised.

The goal of IFRS 16 is to make balance sheets more transparent by requiring companies to bring most leases on balance sheet, thereby recognising new assets and liabilities. Specifically, operating leases which have not been on company balance sheets for years but now will be. They will be amortised and expensed not on a straight-line basis, but rather on a decreasing balance basis, which means the size of the expense incurred each month will vary. Putting leases on balance sheets enables analysts to see a company’s own assessment of its lease liabilities, calculated using a prescribed methodology that all companies reporting under IFRS will be required to follow. Bringing operating leases on-balance sheet also changes the profit or loss account of lessees and affects metrics based on profit figures, such as remuneration in certain cases. Therefore, from 2019 leases will be accounted for as if the firm had borrowed funds to purchase an interest in the leased asset which typically results in a higher interest expense in the early years than in the later years.