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Transition to IFRS 16 and its impact

Discuss About The Determinants Corporate Lobbying Intensity.

The purpose of the report is to enquire into the need for understanding the transformation and changes which is soon to be implemented in the form of IFRS 16. Erstwhile provision of leases which was prevalent in the form of IFRS 17 would be abolished because of the complexity of the proceeding advocated by IFRS 17.

The audience for the report are the various accountants, financial experts and various finance personnel of the companies all over the world, whose activities would be impacted by the implementation of IFRS 16.

The primary decision to be made is the decision regarding the final adoption or refusal of the implementation of the new lease provisions which is being implemented in the form of IFRS 16.

All the latest information, data and recent developments which are taking place in the international accounting bodies and their journals are the main sources of information available. A close eye on their developments is the source of real information.

For this project, certain key words like IFRS, lease provisions of IFRS, operational and financial lease and lease accounting are some of the key words which have been used.

  1. Academic resource: De Villiers, R.R. and Middelberg, S.L., 2013. Determining the impact of capitalising long-term operating leases on the financial ratios of the Top 40 JSE-listed companies. The International Business & Economics Research Journal (Online), 12(6), p.655.
  2. Academic resource: Ellimäki, P., 2016. Transition to IFRS 16 Leases and its Impact on Key Financial Ratios for Construction Companies in Finland.
  3. Website: https://www.accaglobal.com, A. (2018). IFRS 16, Leases | F7 Financial Reporting | ACCA Qualification | Students | ACCA Global. [online] Accaglobal.com. Available at: https://www.accaglobal.com/sg/en/student/exam-support-resources/fundamentals-exams-study-resources/f7/technical-articles/ifrs16.html [Accessed 15 Apr. 2018].
  4. Academic report: Mellado, L. and Parte, L., 2017. Determinants of corporate lobbying intensity in the lease standard-setting process. Revista de Contabilidad, 20(2), pp.131-142.
  5. Website: O'Donovan, B. (2018). New leases standard – Introducing IFRS 16. [online] KPMG. Available at: https://home.kpmg.com/xx/en/home/insights/2016/01/leases-new-standard-balance-sheet-transparency-slideshare-first-impressions-ifrs16-130116.html [Accessed 15 Apr. 2018].
  6. Academic source: Öztürk, M. and Serçemeli, M., 2016. Impact of New Standard" IFRS 16 Leases" on Statement of Financial Position and Key Ratios: A Case Study on an Airline Company in Turkey. Business and Economics Research Journal, 7(4), p.143.
  7. Website:co.uk. (2018). [online] Available at: https://www.pwc.co.uk/assets/pdf/ifrs-16-the-leases-standard-is-changing.pdf [Accessed 15 Apr. 2018].
  8. Academic source: Svoboda, P. and Bohušová, H., 2013. Convergence of IFRS and US GAAP in the field of lease: the impact of new methodological approaches for operating lease reporting. Acta Universitatis Agriculturae et Silviculturae Mendelianae Brunensis, 60(7), pp.345-358.
  9. Website:deloitte.com. (2018). [online] Available at: https://www2.deloitte.com/content/dam/Deloitte/sg/Documents/audit/sea-audit-IFRS-16-guide.pdf [Accessed 15 Apr. 2018].
  10. Website:com. (2018). Retrieved 22 April 2018, from https://www.ey.com/Publication/vwLUAssets/ey-leases-a-summary-of-ifrs-16-and-its-effects-may-2016/$FILE/ey-leases-a-summary-of-ifrs-16-and-its-effects-may-2016.pdf
Due to the issues of IFRS 17, the IASB had begun revising various provisions of the IFRS 17, back in 2006, resulting in setting up a group for holding discussion regarding users, provision setters and role of auditors. In IAS 17, the classification into operating and financial lease was not required and a clear and precise mention of all the lease details was not present in the balance sheet of the company (De Villiers and Middelberg, 2013). Previously after the classification into operating, certain lessees did show neither the asset nor the liability, they just showed the lease payments as an expense in the profit and loss.

Here the classification of the leases into finance and operating lease is done and there are five situations have been specified which are:

  • Transfer of ownership
  • Option to purchase the asset at a price which is less than fair value
  • Lease term is for the major part of the economic life of the asset
  • Present value of the Minimum lease payment is close to the fair value
  • Leased assets are of specialized nature (Www2.deloitte.com, 2018).
  • Plant & Equipment( Debit) and lease liability (Credit)

Finance Lease (Lessee):

  • Depreciation of lease asset:

P/L-Depreciation expenses (Debit) and Accumulated depreciation (Credit)

  • Minimum lease payments: this includes reduction of lease liability and finance charge and the journal entries are:

Lease liability P/L- Interest expenses (Debit) and Cash/bank (Credit)

This time the lessee does not recognise any asset and he/she is just concerned about the lease payments which are recognised as an expense on a straight line basis.

At the outset, it is to be assessed if the contract contains lease, which specifically states the presence of the right to control from a lessor to a lessee in lieu of a consideration. (Www2.deloitte.com, 2018) Next at the commencement, the lessee recognises the ‘right of use of asset’ and the ‘Lease liability’.

Accounting by lessee:

Right of asset use:

P/L-Depreciation expenses (Debit) and Right of use-Accumulated depreciation account (Credit)

Lease liability:

P/L-Interest (Debit) and Lease liability (Credit) for interest on the lease liability

Lease liability (Debit) and Cash/bank (Credit) for reduction of lease liability

The three main industries which would be primarily affected by the implementation of IFRS 16 are:

  • Telecommunication
  • Transport and logistics
  • Real estate and equipment lessors.

Telecommunication: Telecom companies have a huge number of items such as network equipment, satellite transponders and cell towers. They would face an uphill task in the identification of a lease. As determining an arrangement is actually a lease or not can be a complex task leaving it to the judgement of the telecom companies.

Determinants of Corporate Lobbying Intensity

Transport: Renewal options for big leases like trains, ships, aircrafts, real estate requires economic incentives. This requires substantial judgement.

Real estate: They have to address the changing needs of the lessee as it may lead to more requests for shorter lease terms and variable payments from the lessee’s side (https://www.accaglobal.com, 2018)..

Transport industry: The industry should make an initial impact report and identify the areas of key impact, if they do so, they would be able to determine the best options which would suit their business requirements. (Pwc.co.uk, 2018). Thereafter, they should accurately ascertain the processes which would lead to a smooth switchover from IAS 17 to IFRS 16.

Telecommunication: Telecoms sector companies will need to undertake an early assessment of the impact on their results, and if possible on that of their associated companies and to develop a plan for explaining this to their shareholders and other stakeholders.

Real estate: These entities should begin to educate leasing and tenant coordination departments about IFRS 16 in order to initiate a smooth and effective transition and decrease the impact of the new standards. In this regard, the companies should identify a cross-functional team and develop a project plan with efficient project management plan to initiate its implementation.

The communication of all the necessary changes to the various clients and the stakeholders is of vital importance. This would assist in providing a true and fair view of the happenings of the company. The communication could take place in two ways:

  • Management representation: In this process, the auditor or the accountant, who is the perceived representative of the stakeholders, writes a letter mentioning all the necessary changes in IFRS 16, which shall be sent to all the clients and the stakeholders of the company.
  • Oral communication: In case of oral communication, the company can call for an annual general meeting and disclose all the necessary changes in a face to face scenario.

The need for a specialist team is essential, as it would help in effectively clearing all the doubts about the necessary changes, which would take place because of the change to IFRS 16 (Ellimäki, 2016). It would also help in lobbying for the implementation of IFRS 16.

In this case, it would be worthless to hire a specialist team to handle this, as it is a normal business related issue which should be looked after internally and hiring a team for this would be waste of resources (Mellado and Parte, 2017). Moreover, the lobbying would by an individual firm would be of no significance, as it would not create a huge impact. As a result, it is recommended that the company should drop the idea of hiring a specialist team for this purpose.

The company should collaborate with the big four and send their audit and accounts experts to them in order to take part in many IFRS training workshops, which would help them to understand in a better manner and ensure proper implementation. These workshops would cover topics such as impact on balance sheet, leverage and capital ratios, possible impacts on the areas such as accounting and finance, IT, tax, operations and real estate.

Impact of New Standard IFRS 16 on industries

The introduction of IFRS 16 would lead to the creation of a principle based and simpler accounting standard which could be enacted internationally leading to smooth comparison. Classification is also a complex task; it often results in similar transactions being accounted for differently. Lessor accounting treatments are based on a deferral approach which is out of sync with the revenue recognition principle which is normally followed (Öztürk and Serçemeli, 2016).

However, the standard also suffers from a variety of flaws which makes it complex in nature. Various contract parameters such as indexation rights, service costs, restoration costs etc. These contracts can influence the accounting treatment for individual contracts which could make it complex for skilled accountants too.

In case of lobbying, maintaining or hiring a separate team of specialists is not a wise affair as it would lead to a complete wastage of resources. Individual companies do not have so much power to change the plans and implementation of those plans which have been brought about international accounting bodies as it would account for too little. In these kind of circumstances, it is understood that lobbying teams of individual companies do not account for too much and it is recommended that they should refrain from hiring such specialist lobby teams.

References:

De Villiers, R.R. and Middelberg, S.L., 2013. Determining the impact of capitalising long-term operating leases on the financial ratios of the Top 40 JSE-listed companies. The International Business & Economics Research Journal (Online), 12(6), p.655.

Ellimäki, P., 2016. Transition to IFRS 16 Leases and its Impact on Key Financial Ratios for Construction Companies in Finland.

https://www.accaglobal.com, A. (2018). IFRS 16, Leases | F7 Financial Reporting | ACCA Qualification | Students | ACCA Global. [online] Accaglobal.com. Available at: https://www.accaglobal.com/sg/en/student/exam-support-resources/fundamentals-exams-study-resources/f7/technical-articles/ifrs16.html [Accessed 15 Apr. 2018].

Mellado, L. and Parte, L., 2017. Determinants of corporate lobbying intensity in the lease standard-setting process. Revista de Contabilidad, 20(2), pp.131-142.

O'Donovan, B. (2018). New leases standard – Introducing IFRS 16. [online] KPMG. Available at: https://home.kpmg.com/xx/en/home/insights/2016/01/leases-new-standard-balance-sheet-transparency-slideshare-first-impressions-ifrs16-130116.html [Accessed 15 Apr. 2018].

Öztürk, M. and Serçemeli, M., 2016. Impact of New Standard" IFRS 16 Leases" on Statement of Financial Position and Key Ratios: A Case Study on an Airline Company in Turkey. Business and Economics Research Journal, 7(4), p.143.

Pwc.co.uk. (2018). [online] Available at: https://www.pwc.co.uk/assets/pdf/ifrs-16-the-leases-standard-is-changing.pdf [Accessed 15 Apr. 2018].

Svoboda, P. and Bohušová, H., 2013. Convergence of IFRS and US GAAP in the field of lease: the impact of new methodological approaches for operating lease reporting. Acta Universitatis Agriculturae et Silviculturae Mendelianae Brunensis, 60(7), pp.345-358.

Www2.deloitte.com. (2018). [online] Available at: https://www2.deloitte.com/content/dam/Deloitte/sg/Documents/audit/sea-audit-IFRS-16-guide.pdf [Accessed 15 Apr. 2018].

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