Although many FDs may think they know what is in store with IFRS 16, the level of complexity involved in addressing the standard may not be immediately clear. Implementing IFRS 16 is as much a challenge of gathering, cleansing and maintaining data as it is about a change of accounting policy and the responsibility of meeting this challenge lies firmly within the finance function.
A significant number of finance professionals have not put in place the adequate systems, processes and controls required to ensure a smooth transition. That might be because many finance functions simply haven’t yet had a chance to address the issue, while others may not be clear about what is required. Nevertheless, time is running out for the large number of companies affected by the new standard.
The challenge ahead
Finance professionals need to understand that IFRS16 is more than just additional disclosures in a company’s statutory accounts. The new rules for accounting treatments will have a significant impact on the Income Statement, Balance Sheet and Cash Flow Statement.
Expect more transparency to lease obligations by accounting for operating leases on the balance sheet. With IAS 17, these ‘off-balance sheet leases’ may have represented a significant financial obligation that investors and analysts may not have previously had full visibility on. Bringing these items onto the balance sheet will have a significant impact to the financials – for most organisations this will be at least tens of millions with many organisations reporting impacts running into the hundreds of millions and in some, even billions of pounds worth of changes.
Under the new standard, operating lease costs disappear – to be shown in the P&L through Interest Expense and Depreciation. This will have an impact on EBIT and EBITDA – a key performance metric of many companies.
Continue Viewing This FinancialDirector Story