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On January 13 the IASB (the International Accounting Standards Board) issued the International Financial Reporting Standard (IFRS) No. 16 which addresses the accounting of leases, and replaces the previous standard (IAS 17).
Although I was not able to review the content of this new regulation (incomprehensibly, the document is only accessible for paying subscribers of IFRS website), I have read the project summary and the effects analysis. The points that I would highlight are:
– A single lessee accounting model for operating and finance leases is established; this new model is more similar to the one indicated for finance leases in IAS 17. That is, when formalizing a lease (either operating or finance), the lessee must recognize an asset and a financial liability for the same amount, which is the present value of the payments agreed for the duration of the lease.
– The generated assets will be depreciated during the term of the lease, and the financial liability will be reduced as the payments to the lessor are processed, generating a financial expense (relating to the present value) which will be charged to the result.
– It disappears the lease expense to the Profit and Loss for those cases where IFRS 16 is applied.
– The modification has a neutral effect on the whole life of the lease; the total lease cost imputed to the result with the IAS 17 model shall be the same as the total amount of imputed depreciation expense plus the finance cost following the IFRS 16. Of course, differences in the recognized expenditure will arise in each year if using one model or another.
– The main target is that in the Balance Sheet assets and liabilities arise (already present in the case of an acquisition), improving the comparability between companies and reducing adjustments in the financial information by the user. The difference arose between firms that bought and those who rented.
– Effectiveness from January 1 2019, with the possibility of applying previously only if IFRS 15 is applied as well.
– Exceptions: This new regulation will not be applicable for short-term leases (12 months or less) or when the present value of the asset is low (in the order of magnitude of US $ 5,000 or less).
Some of the comments that can be raised about this model are:
– Application in the different jurisdictions: in the European Union, as an international standard, it will be effective for consolidated financial statements of listed companies. The FASB (the US national standard-setter) has worked closely with the IASB, and a new US lease standard should be released in 2016. But in most jurisdictions it has to be yet defined the regulatory framework (under what conditions and for which companies).
– Impact on SMEs: it must be considered whether the benefits of the new IFRS outweigh the incurred costs in the application by the small and medium size enterprises.
– Impact on key financial metrics: the implementation of the new requirement has a direct effect on magnitudes as used as EBITDA or working capital, for which new references and targets will be needed.
– We’ll have to see which the tax implications of this change are.
This book honours its title: it is a short handbook for introducing to global accounting standards, and for making quick queries. I expected a more detailed book (and even physically bigger), but it just gives general information on IFRS (International Financial Reporting Standards).
The book is divided into three sections:
– General overview of accounting standards: what IFRS are, how IFRS Foundation works and IASB (International Accounting Standards Board) sets the standards, a list of the standards as of 1 July 2014…
This part can be especially helpful for those who approach international standards at first time.
– Information on the use of IFRS: this section (the main part of the book) shows how IFRS are being adopted in several jurisdictions (130 in total). There is an explaining short report for each of those jurisdictions.
I believe that this part won’t very attractive for most readers; however, it can be a first step for those who need to know which the applicable accounting principles and rules are in a particular country.
– Overview of IFRS: this is the most interesting section, where the main principles in IFRS are briefly analysed. It is used a non-technical language and intends to give a portrait of the framework and content of the standards.
Definitely, this is a manual to get started with the basic ideas of IFRS, how they are applied in the different jurisdictions, and which the standards in force are.