Risk Advisory

Overcoming IFRS 16 – Leasing obstacles with ease

May 09, 2024

The introduction of IFRS 16 - Leases has brought about a paradigm shift in how companies account for lease transactions. This accounting standard, effective from January 1, 2019, requires lessees to recognize most leases on their balance sheets, leading to significant changes in financial reporting and key performance indicators.

At MBG, our team of technical experts specializes in navigating the complexities of IFRS 16, ensuring seamless compliance and mitigating potential risks for our clients.

About IFRS 16 - Leases

Under IFRS 16, lessees must adopt a single lessee accounting model, eliminating the previous distinction between operating and finance leases. This new model requires lessees to recognize a right-of-use (ROU) asset and a corresponding lease liability for most leases, with limited exceptions for short-term and low-value asset leases.

The ROU asset represents the lessee's right to use the underlying asset over the lease term, while the lease liability reflects the present value of future lease payments. This change aims to provide greater transparency and comparability in financial reporting by presenting a more faithful representation of a company's lease obligations.

Key Impacts and Considerations

The implementation of IFRS 16 has far-reaching implications across various aspects of your organization, including:

  • Balance Sheet Impact: The recognition of ROU assets and lease liabilities can significantly impact key financial ratios, such as debt-to-equity, asset turnover, and return on assets.
  • Income Statement Impact: Lease expenses are now presented as depreciation of the ROU asset and interest on the lease liability, impacting operating expenses and profitability metrics.
  • Cash Flow Statement Impact: While the total cash flow remains unchanged, the classification of lease payments between operating and financing activities is affected.
  • Disclosure Requirements: IFRS 16 mandates extensive disclosure requirements, including qualitative and quantitative information about leases and their associated risks.
  • Operational Challenges: Implementing IFRS 16 necessitates a comprehensive review of all lease contracts, data gathering, and the establishment of robust processes for ongoing monitoring and compliance.

MBG's IFRS 16 Implementation Expertise

At MBG, our team of technical experts offers a comprehensive suite of services to support your organization's transition to IFRS 16:

  • Impact Assessment: We conduct in-depth analyses to quantify the potential effects of IFRS 16 on your financial statements, business processes, and systems.
  • Implementation Roadmap: Our consultants develop a customized implementation plan tailored to your organization's specific needs, ensuring a smooth and efficient transition.
  • Data Collection and Lease Management: We assist in identifying, gathering, and organizing all relevant lease data, including embedded leases, and establishing a robust lease management system.
  • Technical Accounting Advisory: Our experts provide guidance on complex technical accounting matters, such as determining the appropriate discount rates, evaluating lease modifications, and handling sale-and-leaseback transactions.
  • Policy and Process Design: We collaborate with you to establish robust accounting policies, processes, and internal controls to support ongoing compliance with IFRS 16.
  • System Implementation and Integration: Our team assists in implementing or enhancing lease accounting software solutions and integrating them with your existing systems for seamless data management and reporting.
  • Training and Knowledge Transfer: We provide comprehensive training to your finance, accounting, and operational teams, ensuring a deep understanding of IFRS 16 requirements and best practices.

Embark on a transformative IFRS 16 journey with the confidence instilled by MBG's proven expertise, leveraging our specialized knowledge to maintain an unwavering focus on your core business operations. Contact us today.

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