IFRS 16 is an accounting standard issued by the International Accounting Standards Board (IASB) that provides guidelines for the accounting treatment of leases. IFRS 16 was published in January 2016 and has been effective for companies reporting under IFRS since 1 January 2019. IFRS 16 has a substantial impact on the financial statements of tenants of property, plant and equipment (including real estate) and requires leases to be recognised on the balance sheet by recording a ‘right-of-use’ asset and a lease liability.
Rental contracts for real estate are therefore an important part of many IFRS 16 projects. Tenants are presented with many practical accounting challenges in making the following assessments:
In addition to these challenges, tenants will notice that the IFRS-16 standard significantly changes the way leases are accounted for in financial reporting. That in turn affects important financial ratios and impacts indirectly on loan covenants with the bank.
The periodic assessment of leases therefore requires a thorough knowledge of both IFRS-16 and the leases themselves.
It is therefore relevant for organisations that account under IFRS to consider the impact of ownership or long-term leases on the balance sheet and therefore the financial ratios of the organisation. In that context, one must always consider whether ownership or rent is the best option in each specific case (in addition to other strategic considerations, of course). Do you want to convert your property ownership into rental? Read our article “Sale & lease back as a panacea?”.
See also our publication ‘Lease accounting driver for change in decision-making about Corporate Real Estate’ and ‘Tim Schelle conducts graduation research at REDEPT’.
