The IFRS 16 Leases, issued by the International Accounting Standards Board (IASB), will be effective from 1 January 2019, requiring companies to bring most leases ‘on-balance sheet’, recognising assets and liabilities for the rights and obligations created by leases.
Apart from short-term and low value asset leases, lessees will be required to recognise leases on the balance sheet by recognising a ‘right-of-use’ asset and a lease liability.
According to Maia Financial chief executive Daniel Blizzard, accountants and their clients will now have to deal with an increase in risk-weighted assets and in dealing with financial institutions to access capital.
“Accountants with their business clients are facing two critical issues; one, the banking market is changing, regulation is changing dramatically, the amount of banking capital I believe will reduce in the future, and two, the IFRS 16 is creating a lot more leverage for balance sheets where assets will be coming onto the balance sheet where previously they were off the balance sheet,” Mr Blizzard said.
“For accountants, they have a double whammy, how do you help people find the money to grow, and develop their businesses when that's becoming scarcer, and two, how do you then work through a balance sheet that's actually increasing in leverage where in some cases assets are coming back onto the balance sheets?”
“I think accountants have to work very hard to overcome these issues for their clients in the future.”
PwC believes the new standard will “gross up balance sheets and change income statement and cash flow presentation” that will have an impact on financial ratios and performance metrics.
Likewise, Mr Blizzard believes the standard changes will bring further complications to business seeking capital for growth.
“How will banks behave to new leverage that's appearing on balance sheets when it comes to refinancing?” asked Mr Blizzard.
“How will rating agencies rate your companies with new leverage and new assets appearing on your balance sheets that weren't there before?
“There's a lot of unknown around that and combined with the regulations that are coming through thick and fast and we don't know how the institutions of the past are going to react to that.”