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Do I Need to Comply With IFRS?

As a common accounting language, IFRS is currently the required accounting framework in more than 120 countries. IFRS requires businesses to report their financial results and financial position using the same rules, this means that, barring any fraudulent manipulation, there is considerable uniformity in the financial reporting of all businesses using IFRS, which makes it easier to compare and contrast their financial results.

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The Impacts of IFRS 16

  • Operating and finance leases have effectively ceased to exist as virtually all leases are accounted for “on balance sheet”.
  • The standard impacts a company’s asset turnover, interest cover, EBIT(A/AR), operating profit, net income, cash flows and financial ratios, among others.
  • It brings greater clarity and comparability of financial statements by recognising all assets and liabilities arising from leases on the balance sheet.
  • Short term and low-value asset leases are exempt from balance sheet reporting.
  • The standard replaced IAS 17, however, lessor accounting remained mainly unchanged.
  • The IASB estimated that 1 in 2 listed companies was affected. 85% of leases were not currently recognised on the balance sheet.
Quadrent IFRS 16

The Definition of a Lease Under IFRS 16

As nearly all leases are accounted for “on-balance sheet”, leases are no longer classified as an operating lease or finance lease in the same way they were under IAS 17. Instead of being based on risk and reward, the classification of leases focus on control of the right of use asset.

In order to provide greater clarity on the identification of a lease contract, IFRS 16 includes a revised definition that states a lease as:

A contract, or part of a contract, that conveys the right to use an asset (the underlying asset) for a period of time in exchange for consideration.

A lease exists when a customer controls the right to use an identified item, which is when, the customer:

  • has exclusive use of the item for a period of time; and
  • can decide how to use it.
Agreements that were formerly considered leases under IAS 17 no longer meet the IFRS 16 specification and vice versa. Identifying leases is important for all entities as not all contracts, such as service agreements, are included in the scope of IFRS 16, which in turn affect what assets and liabilities are recognised on the balance sheet.
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Treatment of Contracts With Lease and Service Elements

Another consideration for all entities is the treatment of contracts containing both lease and service elements. Many entities within this industry regularly lease assets combined with other services (e.g. maintenance). It is also not uncommon for lessors to bundle assets and services together into a single product offering. Such lease bundles may need to be separated out to account for the lease and service elements independently.

Under IFRS 16 these separate elements should be split and allocated based on a relative stand-alone price. If the exact price of the breakdown is unavailable, lessees have two options. Either to use an estimate based on observable information (e.g. a price based on an existing agreement’s breakdown or similar contract from the supplier) or to use the optional practical expedient. Using this latter method, lessees have the option to account for a lease component and any associated non-lease components (e.g. service element) combined as a single lease component.

Whilst it is possible for a service contract to contain a lease, an identified lease can not be treated as a service. Also, if an entity chooses to use the practical expedient for one class of underlying asset, they must use it for all other leases of this asset type.


Accounting Reliefs

To reduce the costs and operational demands of implementing IFRS 16, the IASB included exceptions and modifications. IFRS 16 introduced an estimated US$2.8 trillion of lease commitments to global balance sheets, but did not include all leases as entities were not required to report:

  • Short term leases that span 12 months or less
  • Leases that terminate within 12 months of implementation
  • Small ticket asset leases that were;
    • not dependent on, or highly interrelated with, other leased assets
    • within the suggested threshold of roughly $5,000 as the value of the underlying asset when new.

What is LOIS?

LOIS refers to Quadrent’s Lease Optimisation Information System. This Saas Solution is a fully integrated portfolio and asset management tool for all your IFRS 16 lease accounting compliance. We operate it under a master agreement. Plus, we’re the only supplier in Australasia.

LOIS is a powerful solution that delivers all the tools and functionality needed to extract, validate and report on all the critical data within a lease portfolio that is required for full compliance to both IFRS 16/AASB 16 and FASB ASC 842. By loading all of your lease data onto LOIS, you’re easily able to analyse your entire portfolio and identify what leases are impacted by the standard.

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Companies that use LOIS to manage and enhance their lease portfolio are able to produce all the accounting information required to accurately complete the financial statements obligatory for compliance; including income statement, cash flow and balance sheet. LOIS will generate complex calculations for you at the touch of a button.

LOIS will provide users with all the necessary tools, features and reporting capabilities needed so that they are able to effectively communicate and collaborate with the key stakeholders of their organisation. Whether that’s by receiving automated alterations and notifications, running reports that form part of their readiness or impact assessments, or identifying areas within a portfolio that can be optimised – LOIS is the perfect partner for compliance.

Find Out More About LOIS
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Helpful Resources

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