What is the best option for your business?
Your choice of transition option and practical expedients will affect the costs and timing of your implementation project – and your financial statements for years to come.
In January 2016, the IASB issued IFRS 16 Leases – a major step towards realising its long-standing goal of bringing most leases on-balance sheet for lessees. All companies that lease major assets for use in their business will see an increase in reported assets and liabilities. This will affect a wide variety of sectors, from airlines that lease aircraft to retailers that lease stores. The larger your lease portfolio, the greater the impact on your key reporting metrics.
The standard features a single lease accounting model for lessees – with a host of different transition options and practical expedients. Many of the options and expedients can be elected independently of each other. Some can even be elected on a lease-by-lease basis.
Most of the choices you have to make on transition involve a trade-off between cost and comparability. That is, the options and expedients that simplify and reduce the costs of transition tend to reduce the comparability of your financial information.
This could affect your financial statements in your year of transition and for years to come, until the last lease in place at transition has expired.
Choosing the best transition option for your business will require thought – and probably some detailed modelling of alternative approaches.
This publication provides an overview of the transition options and expedients. To help you understand their impact, we’ve prepared a comprehensive example modelling how the options would affect the financial statements of a fictional company. We hope it will help you take the first step towards transition.