Tackle IFRS 16 reporting for year-end with ease and confidence
Are you working on your IFRS 16 reporting for year-end, or know it’s coming up soon? It’s one of the more complex parts of the year-end process, but with proper preparation, it can be much easier. Richard Nilsson, IFRS 16 expert, shares key tips and checkpoints to help you with your reports and avoid last-minute stress.
Are all leasing agreements included?
By the time the Christmas and New Year's holidays arrive, it is usually clear if new agreements have been signed and started in December or earlier in the year. Keep in mind that new agreements only apply to those that start during the current year – agreements that start on January 1 of the following year are not included. This is because new agreements should be calculated starting from their start date, not before, even if it is known that the agreement will be signed or may have already been signed.
Have you handled all the agreements that need to be modified or extended?
During the year, changes may have occurred in already signed agreements. These changes could include:
Agreements terminated prematurely
Agreements that have been terminated prematurely are cancelled. As these agreements have not expired, there will be a difference between the asset and the liability (equity). This difference is settled on the income statement as other operating income.Agreement that has been extended
When agreements are extended, they are treated as a revaluation and an adjustment to the acquisition cost. Even if, for example, a vehicle lease is extended by just six months, a revaluation must still be made. The agreement is not reclassified as "Low Value/Short Term" simply because the extension period involves a minor increase in acquisition cost.
Agreements that need to be re-evaluated
Within IFRS, you must constantly have a correct assessment of your agreements over time. Cars and other equipment are usually assessed according to their leasing period, while real estate contracts are usually assessed based on an assumed period that also includes an extension option. There is no direct rule that says exactly when this revaluation should happen, but it is customary for it to happen at least before the notice period of a contract's legal end date (9-24 months). The revaluation must then take place when a decision is made and not in connection with the termination of the agreement. This means that if an agreement is terminated in 12 months, the revaluation should take place already now if a new assessment has been made.
Have you looked at the loan interest rate?
When the interest landscape changes, the marginal lending rate may be adjusted. For leasing agreements that are already in place, no immediate update of the interest rate needs to be made. However, when reassessing an agreement and for new agreements, it is important that you use the current marginal lending rate, and not just reuse the rate that was used before.
Let's say you reassess your premises and decide you will stay there for another five years - that's when you should use an updated marginal lending rate. This means that you should apply the interest rate that reflects the current financial situation and reality. For agreements already entered into that have not been revalued, the interest rate is not adjusted. For a given leasing fee, a higher loan interest rate results in a lower acquisition value and vice versa.