IFRS 16 is now! An opportunity for dynamic and proactive management of its real estate.
As part ofits ongoing efforts to simplify and harmonise international accounting standards, the International Accounting Standards Board (IASB)* has introduced IFRS** 16. It is scheduled to come into force on1 January 2019.
Standardization of accounting practices for leases.
This standard will apply primarily to listed companies in the EU and their consolidated subsidiaries, but also to all companies that choose to apply IFRS 16. It will therefore apply to all leases, and therefore all commercial leases, taking into account the commitments associated with them.
The purpose of this new standard is tointegrate all the parameters of a commercial lease, to identify the obligations it generates, in particular the rents due during the firm commitment period, as a balance sheet item in the form of a debt.
Today, rental instalments are considered as operating expenses, i.e. off-balance sheet commitments. They do not take into account the specificities of leases that commit the company on a multi-year basis.
The changeover to the new IFRS 16 will provide an x-ray of the commitments made by the company in its balance sheet and will make it easier to compare a company's accounts by bringing to light rental commitments that were previously unidentified compared to ownership.
This new standard changes the analysis and financial interpretation of commercial leases by including the rent and its duration in the liabilities side of the balance sheet. This has the effect of creating a "depreciable" right of use.
The financial consequences will therefore be twofold: on the one hand, an increase in EBITDA and, on the other, an increase in debt that could modify the banking covenants.
The conditions of application are as follows:
- Contracts > 12 months
- Valuations > 5,000 US Dollars
This does not apply to contracts that are considered to be the provision of a service, without a strict definition of the goods rented (coworking, certain storage space rentals, etc.)
The consequences for the management of your business property.
The modelling of this accounting entry requires an exhaustive knowledge of its real estate and leases (commercial, civil, etc.).
The real estate departments, which are the essential cogs in the wheel and the preferred contacts of the general and financial departments, must structure themselves to allow the other departments access to the necessary data.
Documentation for extraction will include:
- The lease and its amendments
- Rent receipts
These elements will allow the modelling of the "rental" commitment, in particular :
- The terms of the firm commitment
- The amount of rent
- Indexing indices
- Accompanying measures
- Ancillary costs, such as: legal fees, marketing fees or installation costs
Finally, certain information will be necessary for the evaluation of contracts: the discount rate, the market rental value, the renewal rental value, the right to lease, etc.
In relation to all of these elements, it is now essential to have an exhaustive inventory of the entire stock. It can be difficult to compile such an inventory when the real estate is made up of different types of assets spread throughout the world (retail, laboratories, service sector, etc.).
One of the challenges for companies is therefore to ensure that the database linked to their real estate is regularly updated, according to predefined processes, associated with governance and frequent checks.
This raises a number of questions for companies:
- Is it better to buy than to rent?
- What strategy to adopt in negotiations?
- How to structure its accompanying measures?
- How to choose the length of the commitment beyond the end of the lease?
- What rental value should be retained for renewals?
- What variations in floor space (based on changes in staffing levels/modes of accommodation) will affect my rental commitments?
Our teams are at your disposal to discuss these different questions. Please contact us.
Find out more about our property valuation service Parella Valuation.
* International Accounting Standards Board
** International Financial Reporting Standards