What is IFRS 16 and what does it mean for lease agreements?

February 22, 2024

Leasing is a valuable and widely used financing solution, providing not only flexibility but also enabling businesses to access and use plant and equipment without incurring large capital outlay from the outset.

The introduction of IFRS 16 brings a significant change to financial statements, in particular how a business should recognise, measure, present and disclose leases. Effective for PLCs since 2019 and implemented into the NHS in 2022, IFRS 16 introduces a single lessee accounting model, requiring lessees to recognise assets and liabilities for the majority of leases on their balance sheet.

What is IFRS 16?

IFRS 16 is an International Financial Reporting Standard for leases and marks the elimination of off-balance sheet accounting previously used for Operating leases.

Under this standard, any business entering into a lease is required to recognise this on its balance sheet whether this be an Operating or Finance lease. This not only impacts the balance sheet of the financial statements, but also has an impact on asset financing, IT systems and processes.

What are the benefits of IFRS 16?

IFRS 16 helps ensure all companies are presenting lease transactions in the same way, and in doing so improving transparency and consistency within their financial statements.

Prior to the adoption of IFRS 16, there was no visibility to the total amounts due in respect to any operating leases and as such an independent review of such financial statements would not reflect the true debt of a company. Including all contracted leases into the balance sheet displays a more accurate view of a company’s overall financial status.

Are there exemptions to IFRS 16?

There are a number of exemptions to IFRS 16 including lease agreements with a term of less than 12 months and also lease agreements for low value assets. Where this is the case, the lessee may elect to not utilise IFRS 16 and therefore keep the lease “off balance sheet”.

How can SAF Solutions support companies through IFRS 16? 

The team at SAF Solutions have been working hard to navigate the complexities of IFRS 16 and are now able to fully support all companies through any leasing or financing problem they may face.

Here at SAF, we fully understand the difficulties that not only the implementation of IFRS 16 presents but also the lack of capital now available to the public sector as a consequence to this accounting change.

Through SAF Solutions, we are able to provide alternative revenue solutions that keep the much-needed new plant and equipment “off balance sheet” with a flexible payment plan that will not incur significant upfront cash investment.

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