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AF 4207 – L6 FINANCIAL REPORTING II

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AF 4207 – L6 FINANCIAL REPORTING IIOn January 16, 2016 the IASB which the board responsible for developing International Financial Reporting Standards (IFRS), issued the IFRS 16 Leases. The IFRS 16 which is going to be ...

AF 4207 – L6 FINANCIAL REPORTING IIOn January 16, 2016 the IASB which the board responsible for developing International Financial Reporting Standards (IFRS), issued the IFRS 16 Leases. The IFRS 16 which is going to be active for the periods starting after January 1st 2019, replaced the IAS 17 and its purpose is to form significant changes to the way in which companies report leasing transactions in the financial statements of lessees. In this shorth essay we are going to briefly present the rationale behind the switch from IAS 17 to IFRS 16 along with the difficulties in its appliance, the industries mostly affected and its impact upon accounting ratios and cash flows. First and foremost, the IASB had recognized that by using IAS 17, companies faced some problems or difficulties in reporting leasing transactions in their financial statements, so the need to update IAS 17 with a more contemporary and improved accounting standard. This is the reason they introduced the IFRS 16. As IAS 17 started being out of date the need for a newer standard became bigger. A lease is defined as a contract that gives the customer the right to use an asset in exchange for a specific amount. IAS 17 which is still in use, separates between operating and finance leases. Finance leases require recapitalization in the balance sheet while operating leases are recognized as expenses. One of the most important and major differentiation that IFRS 16 introduces is the “right of use” (Joubert 2017). Its main goal is to eliminate the distinction between finance and operating leases, by introducing a new accounting single lessee model. Under this new accounting standard, the lessee is should make future lease payments by recognizing lease assets and any related financial obligation. Any lease with terms higher than 12 months goes under this new standard. All leases now have to be included in the balance sheet and seen as leased assets and leased liability. The only notable exception is the short-term leases (less than a year). IFRS 16 will cause changes on the balance sheet which in turn result in major changes in key financial ratios like debt to equity and return on total assets.

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