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IFRS 16 - New Lease Accounting Standard

What's new?

On January 13, 2016 the International Accounting Standards Board (IASB) published the new lease accounting standard IFRS 16, which will replace current IAS 17. While for the lessor current lease accounting principles are broadly unchanged, the lessee is affected by significant changes. In future you, as the lessee, have to account for a right-of-use asset out of a lease contract on your balance sheet. This basically means that you have to take the financial components of the lease, represented in the finance component of the monthly rental, on your books (as asset and liability). In technical terms you will have to depreciate the asset, amortize the lease liability and account for the interest on the lease liability. The costs for the services combined with the lease are not to be accounted for as an asset and only impact profit and loss statement on a monthly basis similar as under current accounting standard. (Exceptions to the new rule are small ticket leases (<= 5.000 USD) and short term leases (< 12 months))

When to start?

New IFRS 16 has to be implemented at the latest for fiscal years containing Jan 1st, 2019. Depending on the companies’ implementation decision, a comparable prior accounting period may be required. Here internal project timelines, system readiness and resources availability will have to be taken into account upon decision taking.

Will my company be affected?

New IFRS Lease accounting standard will only affect companies which are obliged to publish under IFRS. Companies that report under local GAAP only are not affected by the described changes. US GAAP standard expected to change in similar way, but no complete alignment between FASB and IASB in standard elaboration and application criteria has been reached.

In future, shall my company buy rather than lease?

We expect operating car lease to continue as a very attractive formula as the impact on balance sheet, risk positioning and incorporated asset responsibilities are still lower than ownership of cars. The average value of a right of use asset is according to our estimation in average ¼ of the book value of a car (depending on term). The residual value at the end of the lease term is excluded from the balance sheet recognition and all residual value related expertise, especially in area of remarketing and risk assessment, is born by the lessor.

How will Alphabet support my company?

We at Alphabet will support you during and after these changes by giving you professional advice. In all our Alphabet countries IFRS 16 customer champions are available for your questions or information needs. Alphabet will provide you with the upmost of service and information on the upcoming changes and required details on your contracts. For detailed design and introduction of your accounting processes under the new IFRS 16 you should as well not forget to primarily align in time with your local auditor and/or financial system provider.

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