IFRS 16 Post Implementation Review

IASB announces Review of IFRS 16

The announcement of the post-implementation review (PIR) of IFRS 16 is significant for organisations as they navigate the flagship lease accounting standard. Set to commence in the second quarter of 2024, this review will consider the standard’s effectiveness and address the challenges encountered since its implementation. Read on to find out what we know so far, what it means for you and what you need to do.

Overview of IFRS 16

IFRS 16 is one of two new lease accounting standards that have brought the most significant changes to lease accounting in a generation. Administered by the International Accounting Standards Board (IASB), with its sister standard, ASC 842, overseen by the Financial Accounting Standards Board (FASB), these new standards were primarily introduced to improve transparency and comparability in a company’s financial statements.

Under IFRS 16, lessees are now required to recognise most leases on their company’s balance sheet, reflecting lease liabilities and the corresponding leased asset. This standard also mandates the inclusion of lease payments and the classification of both finance leases and operating leases. One of the significant changes IFRS 16 brought was the elimination of the distinction between finance and operating leases for lessees, a key feature of IAS 17. This shift ensures that both finance leases and operating leases are treated similarly, enhancing the visibility of lease liabilities and the underlying assets on the balance sheet.

How Will the Review Work?

Phase 1 of the post-implementation review (PIR) of IFRS 16 will focus on identifying specific areas for examination, with the (IASB) engaging stakeholders, including the IFRS Interpretations Committee and various advisory groups, to gather initial feedback. This phase, involving public consultations and outreach activities, is expected to run from June 2024 to the first quarter of 2025, culminating in the publication of a request for information (RFI) in the first half of 2025. In Phase 2, the IASB will analyse the feedback received from the RFI and other consultations, consider public comments, conduct further analyses, and potentially propose amendments or clarifications to IFRS 16 based on the findings. The goal is to ensure the standard continues to provide relevant and reliable information about leased assets. Phase 2 is expected to take place from mid-2025 and could extend into 2026.

Impact on Financial Statements

IFRS 16 has had a significant impact on financial statements by requiring companies to recognise lease liabilities and corresponding leased assets on their balance sheets. This change has affected key financial metrics, such as debt ratios and asset bases, providing a clearer picture of a company’s financial obligations and resources. The standard, aligned with international financial reporting standards and generally accepted accounting principles, has also led to changes in financial reporting, particularly in how lease payments and interest payments are represented in income statements and cash flow statements, enhancing transparency and comparability. Additionally, the treatment of capital leases and the requirements for annual reporting periods beginning after the implementation of IFRS 16 have further contributed to a more accurate depiction of a company’s financial health.

Challenges and Issues Identified

Implementing IFRS 16 has presented several challenges for organisations. Common issues include the complexity of transitioning from IAS 17, the need for substantial system and process changes, and the difficulties in gathering and managing lease data. Organisations have also faced challenges in interpreting certain aspects of the standard, such as determining the lease term and measuring lease liabilities. Examples and case studies have highlighted these difficulties, emphasising the importance of thorough preparation and continuous support during the transition period.

In many cases. achieving compliance with IFRS 16 has required substantial investment in new systems to replace legacy lease accounting systems that were not compatible with the new standard. Many organisations have had to move away from using spreadsheets, which are often too manual and unreliable for the complex requirements of IFRS 16. Additionally, significant internal resources have been needed to collate the necessary data to record and reclassify lease commitments. This has been particularly challenging for larger organisations with extensive lease portfolios, necessitating comprehensive data collection and system upgrades to ensure accurate and compliant financial reporting.

Benefits of IFRS 16

Despite the challenges, IFRS 16 has brought significant benefits, particularly in terms of lease accounting transparency. The standard has improved the accuracy of financial statements by ensuring that lease obligations are clearly represented on balance sheets. This transparency benefits financial statement users, including investors and regulators, by providing a more complete view of a company’s financial health. Additionally, IFRS 16 facilitates better decision-making and long-term planning for organisations by offering a single, consistent approach to lease accounting.

What Changes Should We Expect?

The post-implementation review of IFRS 16 signifies ongoing developments and future updates in lease accounting standards. Given the scale of the changes already introduced and the significant costs of implementing them, the IASB is not expected to make wholesale changes to the standard. Instead, we are likely to see some refinements. Continuous improvement through stakeholder engagement and feedback is essential to address emerging issues and enhance the standard’s application. For instance, areas such as the complexity of determining the lease term and the challenges in measuring lease liabilities are likely to be refined.

What Next?

In summary, the post-implementation review (PIR) of IFRS 16 is a critical process to ensure the standard’s effectiveness and address any issues encountered since its implementation. Conducted by the International Accounting Standards Board (IASB), this comprehensive review involves two phases: identifying specific areas for examination through stakeholder engagement and analysing feedback to propose necessary amendments. The review aims to enhance the transparency and reliability of financial statements, benefiting all stakeholders. While the implementation of IFRS 16 posed challenges, it also brought significant benefits, including improved transparency and comparability in financial reporting.

As the review progresses, it will allow IFRS to streamline the implementation of the standard, ensuring it continues to provide relevant and reliable information. Organisations should stay informed and engaged, adapting to any changes or updates that may arise. For further engagement and detailed information, visit the IASB and IFRS websites as more information becomes available.

Find Out More

For seamless compliance with IFRS 16, FMIS Lease Accounting is backed by our team of experienced consultants. Discover how we can support your lease accounting needs and ensure you stay aligned with the latest standards. Contact us for more information or to schedule a demo of our system:

Email: sales@fmis.co.uk
Phone: +44 (0) 1227 773003
Web: Request a Product Demonstration