IFRS 16: how to comply with the standard that influences lease registrations

IFRS - International Financial Reporting Standards are constantly revisited and updated to ensure continuous improvement of its application. These changes are intended to ensure greater clarity in financial and accounting information.

The IFRS rules are mandatory for all countries that follow this standard, framing Brazil, which applies to this set of rules.

In January 2019, IFRS 16/CPC 06 (R2) referring to leasing, enters into force, imposing modifications to companies’ lease registration, such as rent of vehicles, offices and other types of assets. This will immediately affect how to identify, to measure and disclose the leasing agreements.

As the deadline for adequacy approaches, it is no longer possible to speak in preparation with a good margin in advance. However, with commitment, organization, and specialized guidance, companies that have not yet started the evaluation process can avoid accounting and operational problems.

Some changes imposed by IFRS 16

According to the current rules, only financial leasing should be recorded in the Statement of Financial Position, with the effects of the other (operating) restricted to the impacts on the cash. As from 2019, all leases must be included in the Statement of Financial Position, except for those that have assets classified as low-value or contracts with length of up to 12 months.

The definition of leasing refers to contracts that give the right to use and control an identifiable asset, such as leasing contracts and contents of service contracts.

• The new rule will directly influence the Statement of Financial Position and the Income Statements.
• All leases where the standard should be applied must be recorded in assets and liabilities.
• With new disclosure requirements, leasing assets and liabilities should be separately disclosed in the financial statements.
• The leasing installments will be accounted for as interest expenses and amortization of the assets set up, and the total expense will be higher in the first years of the agreement.
• The amortization will take place according to the term of the contract. With this, the companies will no longer have a rent expense and will have the record of the amortization of the right to use. This change will directly influence the companies' EBITDA.
• Liabilities must be recorded at present value. The definition of the discount rate for the calculation needs to be evaluated and discussed in order to maintain the correct joining to the standard.
• The asset (right of use) must pass through the impairment test. The basis for the test will be the current leasing market value.

 

IFRS 16 -Changes and influences	Statement of Financial Position	Statement of Income
	Non-current assets will be greater, due to the recognition of the right to use the leased asset, as will current and non-current liabilities.  This will affect financial indicators and covenants.	The depreciation of the asset and the financial expenses of the liability will be recognized.  EBITDA and operating income will increase. It also affects the profitability indicators.

The Statement of Financial Position of January 2019 should be presented in two versions: according to the current model and also in accordance with IFRS 16.

What to consider in the adequacy process

The companies are responsible to evaluate how the leasing contracts registration should be affected and what will be the accounting developments. The consequences will have to be proportional to the practiced leasing operations volume and amount, and some business areas will be more abruptly hit.

It is noteworthy that this is a significant change from what is provided by the current standard, especially for leaseholders. Treatment for lessors does not change in any relevant way.

The path to adequacy involves the knowledge of the standard, a survey of leasing contracts, an analysis to identify the contracts to be adjusted, the initial adequacy and the accounting systematization. In summary, companies should be prepared to:

• Mapping your leasing contracts;

• Reassess how information will be provided;

• Adjust systems, processes, and internal controls.

The transition initiative should not be limited to the companies’ accounting area, but should involve other operational areas that support the process.

Specialized consultancy makes the joining easier

The adequacy to the new accounting model requires that companies promote a mapping of the differences between the method adopted until then and the changes announced so that an action plan for effective service can be prepared.

Given the complexity of the theme and the approximation of the new accounting model enforcement date, having a specialized orientation on the international standards and practices may be the differential for an assertive and agile adjustment.

Domingues e Pinho Contadores has a qualified team to assist businesses of all sizes and areas in verifying their leasing contracts and in promoting necessary adjustments through a planning that meets their clients’ specifics needs.