IFRS 16 Leases applies to an entity’s financial statements for annual periods beginning on or after January 1, 2019. While the adoption of IFRS 16 may require significant work for many lessees, there are various practical expedients you can use to reduce the transition effort. Here, we outline the available practical expedients, the benefits of electing to use them and how they will impact an entity’s financial results.
IFRS 16 provides lessees with a choice between two transition approaches (which must be applied to all leases):
- Full retrospective approach—with restatement of comparative information in accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors. Under this approach, the cumulative effect of initially applying IFRS 16 is recognized as an adjustment to equity at January 1, 2018 for a lessee that adopts IFRS 16 on the effective date and has a December 31 year-end. Comparative figures for the year ended December 31, 2018 are also restated to reflect the adoption of IFRS 16. This approach effectively restates the financial statements as if IFRS 16 had always been applied, with the exception of optional transition relief discussed below.
- Modified retrospective approach. Under this approach, the cumulative effect of initially applying IFRS 16 is recognized as an adjustment to equity at the date of initial application (DOIA) (e.g. January 1, 2019 for a lessee that adopts IFRS 16 on the effective date and has a December 31 year-end). Comparative figures for the year ended December 31, 2018 are not restated to reflect the adoption of IFRS 16 but instead continue to reflect the lessee’s accounting policies under IAS 17 Leases. If a lessee chooses modified retrospective application, a number of more specific transition requirements and practical expedients also apply. These requirements and practical expedients are discussed in further detail below.
When choosing which approach to use, a lessee should carefully consider the cost and benefits of each alternative. In general, the full retrospective approach will provide users of the financial statements with better information but it requires more data and analysis compared to the modified retrospective approach. Some factors to consider include
- the volume and complexity of your leasing contracts;
- the importance of prior period comparative information to the users of your financial statements; and
- the ease of accessing your leasing data. For example, the data gathering may be less time-consuming if your leasing data is organized in a central database.
Lessors are not required to make any adjustments in respect of leases in place at the date of transition, except for intermediate lessors (i.e. lessors with sub-leases). Instead, for lessors, IFRS 16 is applied prospectively from the date of transition.
While each of these practical expedients are meant to provide relief to lessees on transition to IFRS 16, the use of each, or combinations thereof, could have a significant impact on a lessee’s financial results on transition, as well as in subsequent years, until the leases that existed at the DOIA are no longer in effect. To understand the impact of each choice, a lessee should gather its lease information and organize it into usable data sets that can be used for scenario analysis to determine the best path forward.
At Grant Thornton, our advisors use a proprietary software tool to organize all of your lease data, enabling a seamless transition to IFRS 16 lease accounting standards.