The effects of IFRS 16
Until now, around 85% of all leasing operations for publicly traded companies have been listed off balance, that is, not on the balance sheet. The result was a considerable loss of transparency for those reading the annual financial statements. The balance sheet was distorted and the results did not always reflect the facts. Aimed at counteracting this, accounting standard IFRS 16 will significantly reduce discretionary latitude when balancing pending leasing operations and thereby increase the actual informational value for recipients of the financial statements.
IFRS 16 must be applied starting with the fiscal year commencing 1/1/2019. Particularly for consulting firms and their clients who until now have shown the majority of their leasing operations off balance, this means a great deal of work – all of their leasing contracts will now need to be reviewed before the end of this year, and there are only a few exceptions that will allow companies not to balance their leasing transactions.
Instead of dividing in Financial and Operating Leasing the new IFRS 16 allows just two options of choosing to rate leasing contracts off balance. Short-Term Leases up to 12 month and leases where the underlying asset has a low value when new (5000 $ max.) have not to be recorded on the balance sheet. Although the regulation may sound
simple, a detailed look reveals that such a review involves several dozen criteria that will need to be examined in the scope of the evaluation: Are there leasing incentives that will be granted during the lease term and would therefore reduce usage rights? Are maintenance costs or other services included in the leasing costs? Is there a purchase option? Breaking down these criteria and then reviewing and analyzing all existing and upcoming leasing operations will take a great deal of time, effort and patience.
In the worst case, the documents to be analyzed will include hundreds, if not thousands, of contracts that will need to be reviewed thoroughly by auditors. Contract Analyzer assists with classification of the contracts, extracts all of the relevant information and sorts it in an organized manner. Instead of going through thousands of contract pages in tedious detailed work, the consultants will not only know at a glance which contracts are not subject to the balance sheet obligation, but they can also filter contracts based on certain criteria and pursue them accordingly.