View PDF to see P&L Impact, Likelihood on Key Ratios and Balance Sheet Impact.

All corporate companies who use rentals or leasing as a way to access assets will be affected by IFRS 16 when it comes into effect on 1st January 2019. Those which lease high value assets in the retail, airline, transport and logistics industries are likely to be more greatly affected. Historically companies have made extensive use of off-balance sheet operating leases, which are often effected through sale and leaseback transactions, to optimise the balance sheet and maximise available cash for investment in the business and/or reducing debt. However, IFRS 16 will radically change the accounting treatment for these operating leases. Are you ready?

What is the impact?

IFRS 16 comes into effect for accounting periods ending after 1 January 2019, replacing IAS 17. The standard radically changes the accounting treatment for most operating leases. Henceforth they will be treated in a similar manner to finance leases, recognising right of use assets and associated lease liabilities on the lessee’s balance sheet.

The accounting changes will apply to all companies who use rentals or leasing to have access to assets. Those which currently lease high value assets such as real estate, manufacturing equipment, aircraft, trains and ships are expected to be most greatly affected.

The changes will have far-reaching implications for a company’s financing and operations. The effects will be visible on both the balance sheet and on the P&L account, where the lessee will recognise the depreciation of the leased asset and interest cost instead of the operating lease expense.

The accounting changes will impact most financial ratios and potentially affect debt covenants and credit ratings, and public perceptions.

How to action?

Companies are well-advised to undertake a fundamental re-evaluation of their corporate leasing strategy. For example, the benefits of sale and leaseback transactions will be diminished with the adoption of IFRS 16 as virtually all off-balance sheet accounting for lessees will be eliminated.

With appropriate financing, asset ownership can be a more cost-effective solution. This also offers greater control and flexibility over the use of the asset.

Through our Corporate Finance and Real Estate experts, Salamanca Group is able to offer strategic advice and assist with the arrangement of innovative financing solutions for companies who are currently lessees of property or plant. Our support enables companies to (re)purchase their commercial real estate, as well as businesses which already own commercial real estate and are looking to release cash from these assets.

View PDF to see P&L Impact, Likelihood on Key Ratios and Balance Sheet Impact.

This article is part of our December 2018 Group Newsletter

To read the PDF version online, click here, or to read another article online, please follow one of these links:
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