What is IFRS 16?

IFRS 16 applies to all companies reporting in accordance with IFRS that are lessees in rental and lease agreements. The standard has been mandatory since January 1, 2019. It applies to leases with a term of more than 12 months.

What does IFRS 16 regulate?

IFRS 16 is an international accounting standard issued by the International Accounting Standards Board (IASB).

The standard governs the accounting treatment of leases and applies to all companies that prepare their accounts in accordance with IFRS. IFRS 16 replaces the standards IAS 17, IFRIC 4, SIC-15 and SIC-27.

According to IFRS 16, all assets and liabilities from leasing agreements must be recognized in the balance sheet. Off-balance sheet financing of leases (as with IAS 17) is no longer possible with IFRS 16.

When does IFRS 16 have to be applied?

IFRS 16 must be applied by all companies that prepare their accounts in accordance with IFRS.

This applies in particular to capital market-oriented companies that are listed on the German or US stock exchange, for example.

Unlike small and medium-sized companies in Germany, for example, which can prepare their accounts in accordance with the German Commercial Code, such groups and companies must prepare their consolidated financial statements in accordance with IFRS.

What has changed with IFRS 16 compared to IAS 17?

Under the provisions of IAS 17 that applied until 2019, it was possible to distinguish between “operating leases” and “finance leases”.

This meant that operating leases did not have to be recognized in the balance sheet - the leased asset did not have to be recognized by the lessee. Although a lessee had to recognize the payment obligations in the balance sheet, the resulting lease expenses only had to be recognized in the income statement.

The IFRS 16 standard has fundamentally changed this: “off-balance sheet“ financing of leases (”off-balance sheet") no longer exists. Instead, the new standard requires the recognition of right-of-use assets and the associated lease liabilities (“right-of-use approach”).

The lessee must now periodically depreciate the right-of-use asset and amortize or pay interest on the lease liability. Depreciation and interest expenses are therefore recognized in the income statement.

What practical expedients does IFRS 16 offer?

The IASB grants lessees two exemptions: low-value leases with a new asset value of 5,000 dollars and short-term leases with a term of less than twelve months.

Is software required for IFRS 16?

For companies, IFRS 16 primarily means increased time and effort. This is especially true if they record their leases “manually” in Excel or external SAP applications.

There are therefore software solutions with which the periodic processing of leasing transactions can be fully integrated, automated and accelerated. These include, for example, the standard solution from SAP (SAP RE-FX) or in-house developments from consulting firms (e.g. GAMBIT Leasing Cockpit).

With SAP RE-FX or the leasing cockpit, the necessary periodic repayment and interest postings can be carried out “at the touch of a button” - i.e. fully automatically, time-saving and IFRS 16-compliant.

And the two solutions have further advantages. These include, among other things

• the periodic mass processing of contract valuations,
  
• the automatic calculation of lease liabilities and rights of use
  
• the valuation of the lease over the entire life cycle,
  
• full integration in SAP (FI-AA, FI-AP and FI-GL),
  
• the evaluation of leases to build up the information in the notes to the balance sheet and
  
• the digitalization of leases.
  

In addition to IFRS 16, both solutions can also be used to meet the requirements of other regulations, such as the provisions of US GAAP ASC 842 and the German Commercial Code (HGB).

Furthermore, the solutions are fully integrated into SAP FI-AA (Asset Accounting), where companies carry out the periodic depreciation of right-of-use assets. The solutions are also integrated into SAP FI-AP (Accounts Payable) and SAP FI-GL (General Ledger Accounting).

The direct integration of the solutions results in further advantages: reporting is improved, transparency is increased and the previously required coordination between the external tool and SAP is no longer necessary.