KPMG partner Roy Leung discusses the implications of the upcoming IFRS/HKFRS 16 leasing standards
It is time for companies which are lessees to start reviewing their internal processes and business operations as an upcoming set of leasing standards will be requiring them to recognise leases on balance sheet.
IFRS/HKFRS 16 will come into effect from accounting periods beginning on or after 1 January 2019 and one of the key changes it is introducing is that lessees will no longer distinguish between operating leases and finance leases. Most leases will be on balance sheet.
Lessees will therefore carry more assets and liabilities, while lease expenses will be front loaded as a lessee will recognise a higher amount of interest expense on the liability in the earlier years than in the later years.
The new leasing standard will have a significant impact on financial metrics and key performance indicators of lessees as most of the leases will be recognised on the balance sheet.
Some sectors will be more affected that others. Retailers, for example, will generally see a significant increase in their gearing ratios, which could more than double for some. Other highly impacted sectors include aviation, transportation and logistics, and telecommunications.
The impacts of the new standard, however, go far beyond financial reporting. Companies will have to consider the wider impact this would have on their systems, processes, business practices and operations. Here are some questions that need to be considered:
These are issues that need to be addressed sooner rather than later. If companies have not done so already, it is imperative they start performing an impact assessment and design a roadmap that details how and when they plan to comply with the new standard. Here is a typical road map for IFRS/HKFRS 16 implementation:
For many organisations, IFRS/HKFRS 16 implementation will be a cross-functional change management project, which might demand much more management time and effort than envisaged. It is critical for companies to act and start preparing now before the standard comes into effect.