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The new lease standard IFRS 16 that has now replaced IAS 17 entered into force as of January 1, 2019. The standard introduces changes primarily for the lessee; there is little change for the lessor.
For lessees, IFRS 16 effectively does away with the terms financial and operational leasing from an accounting perspective and instead applies the principle of right-of-use assets. All lease liabilities must be recognized, regardless of the type of lease.
According to the simplified approach, it is possible to exempt leases that are low-value and short term, which according to the interpretation means leases that refer to assets with a value of less than EUR 5,000 and leases that have a remaining term of twelve months or less.
This standard is based on the view that the lessee has a right to use an asset for a specific period of time and at the same time an obligation to pay for this right.
The debt/equity ratio KPI changes when the liabilities in the balance sheet increase.
The classification in the income statement changes from being recognized as a leasing expense to being recognized as depreciation (for the asset) and interest expenses (for the lease liability). This results in an improved operating profit but impaired net financial items.
Classification in the cash flow statement. Lease expenses that were previously classified as operating activities will only continue be operating expenses to the extent they refer to interest expenses (assuming that the company applies a policy of recognizing interest in its operating activities).
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