What is IFRS?

Businesses have two options for acquiring the assets they need for producing goods or services: purchasing or leasing. Nearly all companies use assets through operational or financial leases.

IFRS 16 requires lessees to recognize a “lease liability” and a “right-of-use asset” at the start of any lease agreement, based on the future lease payments.

In summary, this standard introduces the principle that lease transactions must be included on the balance sheet. It aims to enhance transparency in the financial reports of both lessees and lessors as an internationally recognized standard.

What is the Purpose of IFRS?

The previous standard, IAS 17, allowed businesses to classify leases as either operating or finance leases. This classification often enabled many lease transactions to be excluded from the balance sheet. IFRS 16, however, separates leases into two elements: “right-of-use” and “lease liability,” ensuring that all lease transactions become visible in financial statements.

• Lessees must now report all leases in their balance sheets as “right-of-use assets” and “lease liabilities.” This approach also requires the separation of lease expenses into depreciation and interest expenses.
• For lessors, there is no significant change. They continue to apply the distinction between finance leases and operating leases.
• IFRS 16 may increase the debt levels of businesses and affect financial ratios (e.g., debt-to-equity ratio). However, it provides users with a more transparent financial statement.

What Will IFRS Impact?

• • • • Measurement of financial performance
      • Evaluation of financial lease agreements
      • Financial analyses
      • Accurate calculation and tracking of liabilities and right-of-use assets
      • Adaptation of ERP systems

Conclusion

In the SAP system, this can be addressed using the Real Estate Module or by developing custom solutions for complex scenarios requiring advanced knowledge.

IFRS 16 marks a significant milestone in financial reporting standards, aiming to enhance transparency and comparability. Reflecting leases on the balance sheet presents businesses’ actual financial obligations and assets more clearly. However, this standard can bring substantial changes not only to accounting practices but also to business strategies and processes.

It is crucial for companies to fully understand the impacts of IFRS 16 and develop a suitable strategy accordingly. Proper software tools, expert consultancy, and comprehensive data management play a critical role in successfully navigating this transition. In the long term, this standard contributes not only to financial reporting but also to more informed business decision-making.

Compliance with IFRS 16 enables your business to meet legal requirements while managing its financial structure more effectively.