IFRS 16 (international financial accounting standards) came into force in 2019 and entails major changes that go beyond the accounting area. In fact, its implications for companies cover areas such as finance, real estate, law, taxation, etc., as well as information technology and even marketing and communication.
This law was born from the desire to unify criteria and have a common accounting standard, as well as to provide greater transparency and visibility to leasing contracts. In short, it is a question of providing more information and transparency to investors and analysts.
But what exactly does IFRS 16 consist of? This law modifies the accounting system that has existed until now for leases. Previously, a company with a given lease contract accounted for its expense in the income statement, so that the lease fee simply reduced the profit reflected in that account through an operating expense.
However, with the entry into force of IFRS 16, the lease must be reflected in full in the balance sheet. As an example, a ten-year lease is no longer recognised directly in the income statement, but the right to use the leased asset and the present value of all payments committed under the lease during the ten years as a financed purchase of assets should be included in the assets, the right to use the leased asset and the liability. Each year the income statement will be debited with the depreciation corresponding to the right and the finance charge. The first implication is clear: companies that apply the rule will be much more indebted.
However, IFRS16 is not a law that will affect all companies. It is only mandatory for those companies that present financial statements under these international standards. In this regard, these are mainly large multinational groups or listed companies belonging to consolidated groups. Likewise, it should be noted that lease contracts of less than 12 months or those which amount to less than $5,000 are not covered by the standard.
With regard to the possibility that this regulation will end up affecting the rest of the companies in the market, it is true that a modification of the Spanish General Accounting Plan is being studied and that these changes are usually aimed at following criteria of homogenisation with international standards in order to reduce the differences in the way accounting is carried out in different countries. However, for the moment it does not seem that this standard will be transposed into the Spanish accounting plan given the difficulties of assuming the costs of implementation by SMEs.
Who is really affected by IFRS16
As anticipated, IFRS16 will have implications beyond those of accounting. Therefore, there are several agents involved in this change:
Obviously, the main people affected by the standard will be the tenants who use IFRSs directly.
In addition, it will have indirect effects on landlords and lessors. Although the standard hardly affects the lessor’s accounting, it may impact on their contracts, given the more than likely willingness of lessees to renegotiate their rents, trying to find alternatives within the contracts to reduce the impact on their balance sheets. They will do so by seeking shorter term contracts or by separating the rental part of the contract from the service or maintenance part. If rent is separated from service, the latter could be accounted for as an expense.
The beneficiaries of this change will be investors and analysts, who will enjoy greater transparency and visibility of the information they have to analyse.
With regard to the most affected sectors, these are naturally those with the greatest number of assets for rent. These include the aeronautical, retail, logistics and hotel sectors, although it will also impact markets such as telecommunications, energy and finance.
Main impacts and consequences of IFRS16
The most obvious and direct consequence of the implementation of this new law is the indebtedness of companies, which is the result of the change in the financial structure. It is estimated that companies will suffer an increase of around 15% in their debt. It is therefore likely that it will make it more difficult to access new financing. Furthermore, the financial cost will be higher and could have an impact on dividend policies.
On the other hand, it will have an impact on resources, as companies will have to make a significant investment in readjusting accounting systems, the treatment of new information processes and review systems.