Responding to the new standards, Nexia identified several key impacts and implications that will appear as a result of the changes:
- for lessees, all leases other than short-term leases and low value leases will be recognised on a balance sheet
- for lessors, there is little change to the existing accounting in AASB 117/IAS 17 Leases
- the profile of lease expense recognition changes
- identification of lease and service components of arrangements becomes more important
- changes to balance sheet and income statement will affect key ratios, banking covenants, remuneration and earn-out arrangements
- effect on cash flow classifications in the statement of cash flows
- benefits of sale and lease back arrangements reduced.
The expense recognition profile included as part of IFRS 16 will affect certain financial ratios such as EDITDA, EBIT and times-interest-cover, according to Nexia. The firm also predicted that changes to lease accounting could possibly affect some debt covenants.
“They could result in some entities no longer complying with debt covenants upon application of the new standard if those covenants are linked to an entity’s IFRS financial statements,” the firm noted.
“IFRS 16 will be a significant change for lessees. Entities will need to closely review their lease arrangements and may need to form a number of judgements and estimates relating to lease terms, variable lease payments, low value assets, portfolio accounting and more.”
Nexia urged entities to perform a preliminary assessment as soon as possible to determine the affect that the standards could have on their lease accounting and to consider the judgements required in assessing low leases and portfolio groupings.
