International Financial Reporting Standard No 16 ‘Leases’ (IFRS 16) is effective for financial statements starting on or after January 1, 2019.
 
IFRS 16 will alter the face of balance sheets - many assets that were classified as operating leases and therefore ‘off balance sheet’ will suddenly be recognised as an asset and a liability.
 
Banking ratios will be affected as will analysts ratios for public companies. There will no longer be a finance lease concept. Many airlines for example had few if any aircraft on their balance sheets - these were classified as operating leases. All that will change now! Banks as well as other corporates will be effected far more than many will realise.
 
For all the significant leases, lease liability will be recognised as the present value of future leases payments. ‘Right of Use’ (ROU) asset will be recognised for same amount adjusted for lease incentives and initial direct costs (if any).
 
The ROU asset will generally be expensed on a straight line basis (similar to depreciation on a fixed asset) and the lease liability discount will unwind giving rise to a finance charge, which will reduce as lease payments are made (reducing liability). The effect will be that lease costs, which were historically straight line (i.e. spread evenly over the period of the lease) will now be front loaded as finance leases have been under the previous lease standard.

Ten key questions to ask if you have leases:
 

• Do you have a complete list of all lease transactions with sufficient details?
• Will you elect to grandfather existing lease definitions on transition?
• Do you have systems and processes in place you need?
• Are your existing operating lease disclosures accurate?
• Will IFRS 16 affect your loan covenants?
• Do you have any sale and leaseback transactions?
• How will financial ratios be affected?
• Will you be able to take advantage of the optional exemptions (e.g. for short term leases)?
• Have you implemented a transition plan?
• Do you have a database of all assets under leases?

Companies, if they have not done so, need to urgently evaluate all current lease contracts and put in place systems and processes to adopt the new standard which for most will have been required from January 1, 2019. It is critical to ask for help urgently if you have a lot of leases.
 
For further assistance, please contact Paul Callaghan, Partner (+968 99414631) at paul.callaghan@moore-oman.com.