IFRS 16Â Leases was introduced by the IASB last week in attempt to bring transparency to lease obligations by requiring all leases to be reported on a company’s balance sheet as assets and liabilities.
Ralph Martin, audit technical director for mid-tier firm Crowe Horwarth, has noted that an unintended consequence of the new standard could force those small business owners who currently lease their premises to negotiate their loan agreements with their banks, if they are now breaching their loan covenants.
“Many loan agreements contain covenants based on ratios such as debt-to-equity or interest cover. The new standard could significantly affect those calculations,” said Mr Martin.
“What was treated in the past as an operating lease will now sit in the balance sheet as a liability. The effect could be to trigger a breach of their loan covenants that could give the bank the right to demand repayment of the loan in full,” he added.
Mr Martin noted that retailers and distributors would be the most likely to be affected, but he urged all small businesses to prepare for the 2019 implementation date as soon as possible.
“It’s easy to think that 2019 is nearly three years away, but our advice to small businesses is to start preparing for the change now,” he said.
