The IFRS 16 in a nutshell!
by Eduard Schaepman, on 1 Nov 2018
The end of 2018 is near, so it’s time to start thinking about certain matters. Among other things, the IFRS 16… In January 2019, the new lease standard of the International Financial Reporting Standards (IFRS) 16 will come into force. This includes that listed companies must include all long-term lease commitments as debt on the balance sheet. This also applies to the lease of office space. A good preparation and possibly steps can make a big difference! Do you already know what is going to change, and how, for example, you can prevent your solvency ratio from deteriorating? I present you: the IFRS 16 in a nutshell!
Why is the IFRS 16 being created?
At the moment a distinction is made between a financial lease and an operational lease, whereby only the financial leases are placed on the balance sheet. However, according to the International Accounting Standards Board, this makes 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 will be resolved with the new lease standard, whereby almost all lease contracts are recognized as assets and liabilities on the balance sheet.
To whom does the 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). It is therefore not the case that smaller non-listed companies do not 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 the IFRS 16 mean?
Where every accountant and controller immediately made a distinction between the financial leases and operational leases, this distinction will no longer apply with 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?
Of course, the fewer leasing contracts that have 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 the lease no longer falls under the exemption. In order to continue working with this 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. And even better: we have IFRS specialists everywhere, who can help you in your search for the right approach!