Business in the new era of accounting: Impact of IFRS 16 and Ind AS 116
How long does it take you to brew a cup of tea, brush your teeth or read the newspaper? Not too long, in all probability; these are simple activities after all. Until recently, lease accounting was much the same for you—quick, effortless and easy to understand. But times have changed and aggregating and analysing your lease accounting have become much more complicated, all because of the new lease accounting mandates—IFRS 16 and Ind AS 116.
In January 2016, the International Accounting Standards Board (IASB) issued IFRS 16, ‘Leases’, creating new rules for lease accounts that have been in effect since 1 January 2019. A further draft of Ind AS 116 was also issued, which is likely to come into effect by 1 April 2019. These new standards encourage transparency by advocating a single model for lease accounting by the lessee, and require lessors to classify their leases into two types—operating and finance. This small change has turned the world of accounting on its head.
And its impact on lessees is hard to miss. Under the new standards, a lease has a whole new, much broader definition. Now it’s all about control and benefit. A contract is (or contains) a lease if it allows the lessee to control the use of an identified asset for a period of time and reap the economic benefits of the same. This means that the days of lease liabilities being off-balance sheet are gone. Now lessees will have to recognise these contracts’ assets on their balance sheets, with the exception of certain short-term or low-value assets.
Lessors face a different conundrum in the treatment of a lease. In case of operating leases, they continue to recognise the underlying asset. However, in finance leases, the lessor derecognises the asset and adjusts the net investment to current requirements—acknowledging any profit or loss when the lease goes into effect. The end result? More calculations and larger headaches for the finance department.
But what does all this mean for your business and your accounts? Well, the implementation of the new standards will have a significant impact on the business world, including:
- changes in estimates and judgement
- changes in contract terms and business practices
- change in financial metrics
- changes in the way an organisation communicates with stakeholders.
On a more individual level, the standards will affect:
- Balance sheets: Includes related ratios such as the debt/equity ratio.
- Income statements: Involves recognising interest expense on lease liability and depreciation in the right-of-use asset.
- EBIT and EBITDA: Increases for companies with material operating leases.
- Cash flow statements: Presents payments that reflect interest on lease liability as operating cash flow.
Soon, organisations across the board will need to re-evaluate how they collate, analyse and report their data. In fact, compliance with the new standards may necessitate a total overhaul your accounting methods—which, if done manually, can take up months of valuable time and resources.
In the face of this daunting task, tools like PwC’s Lease Fix are invaluable in helping you streamline the whole process. Lease Fix combines advanced technology with the firm’s in-depth accounting experience to keep you on top of the new requirements. It helps improve data collection and insight generation, so companies can easily address data challenges, quantify lease rentals and automate calculations. This way, you don’t have to wade through a sea of irrelevant data to find the numbers that matter.
With the use of automated tools such as PwC’s Lease Fix, managing your lease data will once again be as simple as brewing a cup of tea.
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For more details on the solution, please write to us at: leasefix@in.pwc.com, products.india@in.pwc.com
