The Gulf businesses need to start preparing for International Financial Reporting Standards (IFRS) 16 now or risk non-compliance when the new financial instruments standard comes into effect from January 1, 2019, according to accountancy and finance body ICAEW (Institute of Chartered Accountants of England and Wales).
While the new leasing standard – jointly initiated by the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) – would be good news for business in the long term, there are significant reporting requirements that businesses need to consider leading up to it, the accounting body said.
The impact (of non-compliance) would vary depending on the sector and company, and is likely to be most pronounced in those business sectors – such as transportation, real estate, mining and construction – where it is common for companies to have a significant number of material off-balance sheet leases.
Those with significant leased premises – such as retailers – would be similarly affected.
These were the narrative of a recent regional panel at the joint IFRS Foundation and ICAEW global virtual IFRS conference on the implementation of IFRS 16 leases standard.
Panelists agreed that IFRS 16 is a significant game changer in financial reporting and affects nearly all industries. According to them, it removes the much-maligned distinction between operating and finance leases, and results in all leases being recognised as finance leases.
“IFRS 16 is a new era of lease accounting. First time application of the new standard is likely to be challenging for many businesses and early engagement to determine the most appropriate option for the business circumstances is critical.
The majority of businesses in the region are behind the curve and they must speed up their efforts and get ready for IFRS 16,” said Michael Armstrong, ICAEW Regional Director for the Middle East, Africa and South Asia. Panellists cautioned that the implementation process is complex and the key to ensuring compliance is to start preparing now to institute the required changes.
At a minimum, businesses must look toward an impact assessment in the short term, with a view to diagnose their state of readiness.
Highlighting that the key challenge facing regional financial businesses when it comes to IFRS 16 implementation is data collection, the panellists said other challenges include measuring the discount rate, assessing the lease term, interpretation of lease contracts, measuring leases denominated in foreign currencies and creation of IT solutions to comply with the new rules.
Armstrong: IFRS 16 is a new era of lease accounting.
