IFRS 16 is applicable for annual reporting periods commencing on or after January 1, 2019. The purpose of IFRS 16 is to provide data that accurately depicts lease transactions, timing, and uncertainties of cash flows that result from leases. Essentially, a lessee must identify the assets and liabilities resulting from a lease in order to achieve the respective goal. Thus, it is advisable for corporations to seek the services of top Audit Firms in the UAE to effectively implement IFRS 16 standards and to stay compliant.
Significance of IFRS 16 to Lease Accounting
- The goal of IFRS 16 is to increase clarity and standardization in the area of lease accounting. Since the significant lease obligations cannot be off-balance sheet items, this change has a huge effect on the corporations’ financial statements.
- According to the new standard, the authority to utilize the assets covered by lease contracts has been emphasized more, with the goal of including the majority of those assets in the lessees’ statements of financial condition.
- To add on, whenever leased assets are recorded, the payment–related requirements must also be shown as liabilities in the balance sheet for the duration of the lease.
- Based on the lease duration and asset value, depreciation and interest components must also be reflected in the income statement over the lease period.
- Following the implementation of IFRS 16, all leases are recognized on the balance sheet as a right-of-use asset and a lease liability, regardless of whether they are operating or finance leases.
Required action by corporations
- Leasing companies are compelled to reveal unrecorded assets and liabilities on their asset reports as a result of the accounting IFRS 16 Leases Treatment which can result in advance contracts.
- Essentially, planning for employee compensation based on profit has to be implemented.
- To stay compliant with IFRS 16, businesses ought to eliminate the necessary data and include a specific register of each active lease. For instance, lease terms and instalments are two examples.
- Further, organizations that lease huge space, like retailers should put into consideration the need for an IT framework to automate a significant portion of the accounting.
Exceptions Permissible According to IFRS 16 for Lease Accounting
In the following situations, the lessee is not obligated to register leased assets as assets under IFRS 16:
- Assets that are leased yet have a value of less than US$ 5000. (value of the item, when new). For instance, assets do not need to be recognized in the balance sheets if a corporation has small lease agreements for office equipment such as printers, PCs, laptops, or office furniture with an asset worth less than US$ 5000.
- Lease agreements with short lease terms (less than a year) in which the lessee has no opportunity to purchase the asset once the lease term has expired. The term of the lease, which is used to calculate how long the lease will last, refers to both the non-cancellable portion of the lease starting on the lease’s start date and the time during which the lessee has the option of extending or terminating the lease.
An increase in Operational Profit and Finance Costs, as well as an increase in Earnings Before Interest, Taxation, Depreciation, and Amortization (EBITDA), will have a significant impact on lessees’ income.
Avail the services of top Audit Firms in Dubai
At Audit Firms in Dubai, We have a team of accounting specialists who assist businesses in effectively implementing IFRS 16 in compliance with the relevant regulations and standards. Our expert team assists corporations with the quantification of modifications at the reporting date and the date of the initial application related to the identification and estimation of lease liabilities. Thus, kindly contact us today and we shall be glad to assist you!
Kasun Liyanage is an Audit Manager with over 7 years of experience dealing with diversified corporate clients. He not only manages the team’s work schedule but also is an expert in handling audit areas such as external audits and fraud investigation, Internal control benchmarking and best practices and well as preparation of financial statements and IFRS compliance.