The expected impact of the implementation of International Financial Reporting Standard (IFRS) 16 – Leases

Abstract

Orientation: The new standard on leases, International Financial Reporting Standard (IFRS) 16, will require the majority of lessees to account for lease arrangements on the face of the balance sheet. This is in contrast to the current standard and, as a result, the effects of this transition to on-balance sheet finance require analysis.

Research purpose: The purpose of this article is to identify and examine the material change implications that may arise from the implementation of IFRS 16 and determine its effect on both preparers and users of the financial statements with a specific focus on lessee accounting.

Motivation for the study: Leasing is a widely used economic transaction that affects the majority of corporates and individuals. There is a lack of formal academic literature surrounding the possible implications of the new accounting standard in a South African context.

Research approach, design and method: The authors performed a detailed literature review as well as gathered information at a public debate held jointly by the International Accounting Standards Board (IASB) and the South African Institute of Chartered Accountants (SAICA) to investigate what the implications may be.

Main findings: This article finds and concludes that there are potentially six change implications. The affected parties were identified as lenders, preparers and analysts with the banking and retail sectors requiring the most consideration.

Practical/managerial implications: Care will need to be taken when new lease transactions are entered into so that the entity still adheres to potential liquidity and solvency targets as well as loan covenant obligations.

Contribution/value-add: The normative and qualitative style sheds light on the effect of the imminent changes to South Africa’s financial reporting structure, making an important contribution to financial reporting knowledge, transparency and accountability.