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IFRS 16: Why it was issued and its impact on financial reporting in practice

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IFRS 16: Why it was issued and its impact on financial reporting in practiceIFRS 16: Lease was issued by the International Accounting Standard Board in January 2016 (PwC, 2016) because the leasing standard IAS 17 was old and outdated (Mina Stanic, 2016). IFRS 16 was applied to have a better result in comparing companies to capitalize on all leases (Jorgen K.B and Thor G.H, 2020). Based on the new standard, the financial statement of companies would be impacted, and the system of accounting would change some principle (Francesca M., Alberto N., Matteo O., 2018). Many sectors would be affected by new standard IFRS 16 (José M.D and Constancio Z.R, 2018), especially the airline industry which has depended significantly on the lease of operating (Bassam Maali, 2018). This essay reviews the reason for adopting IFRS 16 and its influence on financial statements. Analysis Why it was issued While reviewing the new standard, it has been seen that IFRS 16 was issued to have a better presentation and clear information about leases contracts (Tudor L.A, 2018). According to IAS 17, huge amounts of operating leases are hidden from the statement of financial position with vague information in the annotation (Jorgen K.B and Thor G.H, 2020). This leads to eighty-five per cent of leases contracts over the world disappearing on the balance sheet (Mina Stanic, 2016). On the contrary, rented property in IFRS 16 should be recognized as capitalisation model (José M.D and Constancio Z.R, 2018) which requires perceiving all information in financial statements (Morales-Díaz, J. and Zamora-Ramírez, 2018). Therefore, IFRS 16 resolves obscure information about lease contracts (Francesca M., Alberto N., Matteo O., 2018). Along the same vein, the release of new leasing standard IFRS 16 of the International Accounting Standard Board will enhance the quality of financial statements (B. Giner & F. Pardo, 2018), which results in the easier comparison among financial reports (Francesca M., Alberto N., Matteo O., 2018). When applying the new standard, the entity will capitalize on lease contracts (José M.D and Constancio Z.R, 2018) and show all information about those contracts (Morales-Díaz, J. and Zamora-Ramírez, 2018). Thus, the ratio can be calculated based on these data in financial reporting and will reflect better the risk of the company. Especially because of accurate data about these risks the investors can use the ratio to monitor the effective management of the company and consider making investment decisions (Jorgen K.B and Thor G.H, 2020).

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