News and updates on IFRS accounting standards
A new change to International Financial Reporting Standards (IFRS) for leases is in the works. This proposed update will change which leases are considered to be Finance Leases vs. Operating Leases and may have an impact on how potential investors, customers or lenders view your company. Here’s what you need to know.
Operating Leases vs. Finance Leases
Operating Leases are simple to account for. When you have an Operating Lease you pay cash every month and expense the payment as lease expense.
Finance Leases, however, are more complicated. The theory around Finance Leases is that the lessee is, in substance, buying the item and getting a loan from the lessor repayable over time. Finance Leases force the company to capitalize the value of the item to the balance sheet and put the lease liability, the “loan”, as a liability.
Impact to Financial Statements
The new accounting lease standard will essentially recognize nearly all leases as Finance Leases. The impact to your financial statements is an increase in non-current assets with an offsetting increase in both current and non-current liabilities. In other words, you will likely show a decrease in the working capital.
Effect on Investors, Customers or Lenders?
These proposed changes can have an impact on the business. Investors, lenders and even customers make decisions about the Company based in part on financial results.
While for some industries financial results aren’t as important as technological development, mining or oil and gas exploration results or other non-financial metrics, business owners and executives should ask themselves the following questions:
- How will investors, shareholders or strategic partners react to a large increase in liabilities and assets?
- Are there any lenders that have bank covenants referring to current liabilities? This should be considered before entering into loan agreements.
More Changes To Come
In future blog posts, we’ll cover other IFRS updates and discuss the impact they have on your business. Some examples are:
- IFRS 9, Financial Instruments
- IFRS 10, Consolidated financial statements
- IFRS 15, Revenue from contracts with customer
- IFRS 16, Leases
- IAS 28, Investments in associates and joint ventures