Many companies and Audit firms in Dubai continue to see IFRS 16 as a "change for accountants" since it was implemented on January 1, 2019. Many businesses are still trying to understand the implications of IFRS 16 as one of few accounting standards that can impact entire businesses. Some UAE companies organized and streamlined their lease management right away, as demonstrated in the webinar. It didn't produce the best or most efficient result for companies that didn’t plan the work and identify their organizational needs before implementation.
UAE Market Impact Of IFRS 16
Interestingly, IFRS16 has not changed the amount of business leasing. In a study where respondents were asked whether IFRS 16 has changed the amount of leasing their company does. Over two-thirds said that they haven’t changed their leasing activity in the time since IFRS 16 was implemented. Most companies in Dubai and UAE at large have focused on ensuring that their lease accounting practices and reporting comply with the standard.
Surprisingly some UAE businesses continue to use frozen GAAP for management reporting and overlay IFRS16 for external reporting, even though it has been more than two years since the standard was implemented. Analysts and banks in UAE have struggled to agree on the best way to view disclosures due to the inconsistency between reporting methods. This has led to banks using frozen GAAP as a covenant basis. Some companies, however, still believe that there is need for change and that Dubai and other UAE banks should update their covenant parameters in order to conform to the standard.
Investor relations teams, analysts, financiers, and investors learn more about IFRS 16. Companies in UAE need to make sure they are fully informed about the standard and how it affects a business, beyond their accounting and finance departments. Companies with a lease management and reporting system have the opportunity to provide accurate data and communicate what external stakeholders require. This system also serves as a guide for these stakeholders, particularly in light of changes in IFRS 16 standards by banks and credit agencies.
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What Will The Impact Of Changes In Banking And Credit Covenants On UAE Business's Decision-Making?
Changes in covenants by banks or credit agencies can have a significant impact on every aspect of a company's business. Dubai and UAE credit rating agencies have also adjusted their metrics based upon the statutory balance sheet, while banking covenants tend to focus on frozen GAAP. These metrics and covenants are evolving, as the IFRS 16 standards are in place for some time and more data is available.
IFRS 16 changes should not have a negative impact on a company's current or future financial stability. However, it is important for Dubai companies to make strong commercial decisions based upon accurate data. The following are key factors that businesses in UAE need to consider:
- Manager incentives to make the right decisions that take into account the entire business
- Stakeholder education initiatives
- There are significant differences between leasing and buying
- Potential issues with forecasting, especially accuracy
- Benefits of leasing and centralized lease accounting
Today, leasing is still a popular option for many companies in Dubai and UAE alike. It's a smart decision to lease the right assets and reduce your balance sheet exposure. The "as-a-service" culture is growing rapidly. Asset-light companies will perform better, both now and in the future. Dubai companies should look to lease assets that have high obsolescence rates, such as IT equipment and other assets that need regular maintenance.
Maximize Your Return on Investment of IFRS 16 With Audit Firms in Dubai
It doesn't have to be a burden on the administrative side of lease accounting. Audit Firms in Dubai, one of the leading audit services in Dubai, UAE , gives businesses the ability to account for a variety of lease types and value. Our internal auditors and external auditors can help companies in UAE create the processes and systems they need to optimize their lease accounting and management.
The team at Audit Firms in Dubai is a combination of specialized auditing and deep leasing knowledge. We can help you through the entire asset lifecycle. Our highly motivated audit specialists work with businesses to help them manage their leases accurately and improve the data inputs that are used to calculate your business's IFRS16 impacts. This is especially important for companies moving to a post-adoption environment where reporting requirements will continue changing.
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.
