The IFRS 16 in a nutshell!
by Eduard Schaepman, on 27 Feb 2020
In January 2019, the new lease standard of the International Financial Reporting Standard (IFRS) 16 came into force. This standard requires listed companies to include all long-term rental commitments as debt on the balance sheet. This also applies to the lease of office space. Nevertheless, there is still a lot unclear about this subject, so I thought, let's put it on paper! I present you: the IFRS 16 in a nutshell!
Why was IFRS 16 created?
Before January 2019, a distinction was made between a finance lease and an operating lease, whereby only the finance leases were placed on the balance sheet. According to the International Accounting Standards Board, however, this made it difficult to get a good overview of the leased assets and liabilities of a company, while the purpose of a balance sheet is precisely to provide a true and accurate picture of the financial health of a company. This has been resolved with the new lease standard, which recognizes almost all lease contracts on the balance sheet as assets and liabilities.
To whom does IFRS 16 apply?
The new standard applies to all companies that apply IFRS for international reporting purposes. In most cases, these are listed companies and their subsidiaries (even if they are not listed themselves). Not all smaller, non-listed companies don’t have to deal with these regulations, because they can voluntarily choose to work with the new accounting standards. After all, IFRS 16 ensures transparency and a good overview.
What does IFRS 16 mean?
Where every accountant and controller immediately made a distinction between the financial leases and operational leases, this distinction does not apply any longer since the entry of IFRS 16. As from January 2019, all assets and liabilities of all identified lease agreements must be included in the balance sheet. Exemptions apply to leases with a lease term of 12 months or less. If it can be assumed that after the rental period the contract will be extended (or not dissolved), the rental period that is actually expected must be taken into account, and it may therefore be that the lease still has to be recognized on the balance sheet.
The consequences for your company
Your solvency is reflected in the ratio between your balance sheet total and equity. With more lease contracts on the balance sheet, your balance sheet total increases and your solvency ratio deteriorates. This can affect your relationship with stakeholders but can also have a negative effect in closing future contracts.
How can Tribes help you?
The fewer lease contracts that need to be recognized on your balance sheet, the better. Of course, Tribes already offers this flexibility, which makes it possible to enter into a lease of less than 12 months. After those 12 months you can of course extend your contract, but in that case, the lease will need to be on the balance. In order to continue working with the exemption, you will have to move physically. And that is possible at Tribes! You will keep the service, image and facilities you are used to, and we will help you organize the move. With our network of inspiring locations throughout the Netherlands, Belgium, Germany (and soon worldwide), there are plenty of solutions to offer - for small organizations, but also for large, international companies. We are happy to help you in your search for the right solution!