General Impact
Impact on accounting treatments:
IFRS 16 Leases make a significant change in the accounting treatments for operating lease, finance lease, and other complex transaction such as sales and leaseback accounting, etc.
+ For the Lessee: The new standard eliminates a lessee’s classification of leases as either operating lease or finance lease. Instead, almost all leases are ‘capitalized’ by recognizing a lease liability and Right-Of-Use asset on the balance sheet – accompanied by a depreciation of the asset and financial interest to the lease liabilities.
+ For the Lessors: the standard requires lessors to classify each lease as an operating lease or a finance lease. For finance leases: at the commencement of the lease, the lessor will recognize the asset held under the finance lease as a receivable for an amount equal to the net investment in the lease, and recognize financial income over the lease term, based on a model that reflects a fixed periodic rate of return on that net investment. For operating leases: the lessor records lease payments as income on a straight-line basis.
Impact on Financial Ratios:
With the recognition of lease liabilities (including long-term and short-term liabilities) and the Right-Of-Use asset, the current financial ratio of the entity may vary when the application of the new standard takes place. These changes may affect the financial measurement result of the entity, also with the current loan covenants condition.
The objective of IFRS 16 is to report information that faithfully presents lease transactions and to provide a basis for users of financial statements to assess the amount, timing, and uncertainty of cash flows incurred. from the lease. To meet that objective, the lessee must recognize the assets and liabilities arising from the lease.
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