IFRS 16 Leases: Impact on the Aviation Industry

This assignment delves into the effects of the new International Financial Reporting Standard (IFRS) 16, 'Leases,' on the aviation industry. It examines how IFRS 16 alters financial reporting practices for airlines, particularly concerning lease accounting and its impact on key financial ratios like debt-to-equity. The analysis draws upon various sources including academic journals, professional publications from firms like PwC and Deloitte, and insights from legal experts specializing in aviation finance. Students are encouraged to critically evaluate the implications of IFRS 16 for airlines, considering factors such as profitability, risk management, and competitiveness.

IFRS 16
Accounting and Financial Reporting
Running head: Accounting and financial reporting 0

Accounting and Financial Reporting 1
Table of Contents
Table of Figure................................................................................................................................2
Introduction......................................................................................................................................3
Changes to Accounting Requirement..............................................................................................3
Implications for Lessee................................................................................................................4
Implication on Lessor...................................................................................................................5
Effects on Financial Statements.......................................................................................................5
Effects on Balance Sheet..............................................................................................................6
Effects on Income Statement.......................................................................................................7
Effects on Cash Flow Statement..................................................................................................8
Effect on Singapore Airlines Limited..............................................................................................8
Conclusion.....................................................................................................................................10
References......................................................................................................................................11

Accounting and Financial Reporting 2
Table of Figure
Figure 1Implications of IFRS 16.....................................................................................................5
Figure 2 Effect on Balance Sheet....................................................................................................7
Figure 3 Effect on Income Statement..............................................................................................8
Figure 4 Financial Statements of Singapore Airline Ltd.................................................................9

Accounting and Financial Reporting 3
Introduction
A lease is a written agreement between owner of the property and a person or an entity who will
use the said property for a specified period of time on a specified payment. Leases can be of
shorter period and longer period as well where owner of the property is lessor and the person or
business who is using the property is the lessee. The lease contracts involves a series of
payments so the question arise that how the lease and its related payments or installments will be
accounted by the lessee and lessor. FASB and IASB are about to issue a common reporting
standard of financial accounting which will replace the US accounting rules (Cotter, 2012).
IFRS 16 introducing a single lessee accounting model and effective on or after 1 January 2019,
for annual reporting periods and permission for earlier application of IFRS 15 has been granted.
This lease standard is introduced with an objective to report the information which represents the
lease transactions and supports by providing the basis to financial statement users in order to
gage the value and vagueness of cash flows that arise from a lease. IFRS 16 has few transition
provisions in the existing finance leases and operating leases where the financial leases will
remain to be treated as finance leases and operating leases has the option for a full or a limited
reflective restatement in relation to fulfill the requirements of IFRS 16 (Iasplus.com, 2017).
In the following assignment the new requirements of lease standard for both lessee and lessor as
what changes it brings to the existing requirements. The effects on financial statement and a
company who is listed in Singapore exchange and the company chosen for the same is Singapore
Airline Ltd. Which is a world’s largest passenger aircraft.
Changes to Accounting Requirement
The introduction of IFRS 16 bring significant changes in lessee and lessor accounting but
comparatively the changes are more in lessee accounting which is of great importance. However
the changes in accounting for intermediate lessor, those who sublease assets through headlease
and those particular headlease act currently as operating lease. This is done because the assets
and liabilities come to the balance sheet and the classification of the sublease will be determined
by taking the reference of intermediate lessor’s rights on the use of asset. And the implications
for lessees are need to be discussed thoroughly as the percentage of change in accounting
requirement are more to the lessee (Byard, and 2011).

Accounting and Financial Reporting 4
Implications for Lessee
Lessees who adopt IFRS 16 in their accounting have to make changes which are substantial in
nature, likewise there will be no more division in between finance leases and operating leases as
they are being eliminated and can adopt the current finance lease methodologies for all types of
leases. Basically a single method model for all accounting, there are no changes made in the
current rules about calculating the term of lease and it has decide by IASB whenever there are
extension and termination options available. IASB has also allowed leases for a term of not more
than 12 months and the exclusion has been made from the requirements of IFRS 16 for the leases
who are of low value. The “low value” carries no such definition to it but does indicate the
inclusion of tablet computers and laptops but cars are not included. The leases which are
currently treated as finance leases by lessees in their accounting will be the same there are such
changes made therein until and unless lessee guarantee the residual position of lessor (Ey.com.,
2017).
Nonetheless, currently the accounting for leases as operating leases will be changed for the
affected lessees and the changes are:
 In the balance sheet of lessee there will be an asset and a liability;
 Depreciation and interest will replace the current straight line rental expense.
Evidently, the asset of lessee represent their rights of use of the underlying leased asset and the
liabilities of the lessee will represent the obligation of lessee to pay future rentals for the
outstanding tenure of the lease.
The principles of accounting for finance leases will be the same, apparently the lease amount in
lessee’s initial balance sheet with a residual value position will be lower than the full payout
lease. The current operating leases experience the change in accounting where the acceleration of
lessee’s recognition of expense can be seen. The depreciation will be straight line and the interest
cost will be charged initially due to which the expense lines will be affected in the income
statement, the companies who are using EBITDA and related performance measures will
experiences changes. The real estate leases which are treated as operating leases currently will
have more impact in their accounting after the introduction of IFRS 16. The leasing companies
and banks will be positioned as lessees. The tangibility and intangibility of assets for capital

Accounting and Financial Reporting 5
adequacy purposes of the right of use asset on a bank’s balance sheet is still not resolved
(Öztürk, and Serçemeli, 2016).
Implication on Lessor
There are no such changes seen in lessor accounting except the additional disclosures it will
require. For many of intermediate lessors there are few changes who subleases the asset taken
from headlease and that particular headlease is currently seen as operating lease. If the product
structures are transformed and lessors offers service contract in place of leases than lessor will
require accounting changes. From the point of view of lessor there is a minimum difference
between the accounting of hard asset service contracts and operating leases (Www2.deloitte.com,
2017). The changes in accounting for the service element of leases which was introduced by
IFRS 15 will be handled by lessors.
Figure 1Implications of IFRS 16
As shown in figure there is no such changes in lessor accounting and only the disclosures are
required.
Effects on Financial Statements
This newly launched lease standard IFRS 16 abolished the arrangement of leases for a lessee
namely operating leases or finance leases. Leases are to be capitalized after recognizing the net
present value of the lease payments by showing them as ROUA or may be together with the
property or plant and equipment. A company may recognize financial liability which represents
its compulsion to pay in future when the lease payment are made over time (Pwc.de, 2017).
The major impact of the new requirement in IFRS 16 in lease assets and financial liabilities are
the increases and for the companies having material off balance sheet leases the change occur
will be seen in key financial metrics which is consequent to the company’s assets and liabilities,

Accounting and Financial Reporting 6
examples would be the leverage ratios. The key elements of the new standard and its effect on
financial statement will be the replacement of model ‘Risks and rewards’ to Right-of-use model
and at the inception of the lease, lessee is required to recognize the asset and liabilities (Ifrs.org,
2017).
The determination of lease term will require judgment, earlier it was not needed before an
operating lease. With the reference of the lease term estimated all the lease liabilities are
measured based on it. While measuring the lease assets and liabilities when these assets and
liabilities depend on the rate, or an index or on the fixed payment, the contingent rentals or
inconstant lease payments need to be included in it. A lessee must re-evaluate the lease terms
when they spot occurrence of any significant event or a change in such situations where the
lessee can have the control (Ifrs.org, 2017).
Effects on Balance Sheet
The consequence of IFRS 16 on company’s balance sheet is considered by IASB will be for
companies who have incognito leverage leases, the new-fangled lease standard will result into an
increase in the lease assets and financial liabilities. The carrying amount of lease assets will
reduce more than the carrying amount of lease liabilities. This ultimately result into decrease in
reported equity comparatively in IAS 17 for the companies having incognito leverage leases. It is
alike to the effect on equity that arise from financing the asset purchase and it can be from
balance sheet or a loan (Invigorsexecbriefings.com, 2017). The new standard requires company
to report on the balance sheet lease assets and liabilities but does not include short-term leases
and low value lease assets. IASB expects improvement in the comparability of financial
information by IFRS 16 with an intention to recognize assets and liabilities with importance of
all leases and measure those assets and liabilities in the way they are being recognized. Through
a lease the rights and liabilities are being recognized that re obtained and incurred respectively
(Home.kpmg.com, 2017).

Accounting and Financial Reporting 7
Figure 2 Effect on Balance Sheet
Effects on Income Statement
The effects that are considered by IASB by IFRS 16 will have on income statement of company
is the recognition of the expense which are related to individual as well as portfolios of leases,
the appearance of the expenses related to leases see the change and few other effects. The
companies who have assets and liabilities which does not appear on the company’s balance sheet
leases are expected to show the results in high profit before interest and tax, depreciation and
amortization (Hussey, 2017). Whereas operating profit and finance costs also increase but not
with the same percentage and profit before tax will be stable. As per new lease standard the
implicit interest in lease payments for material off balance sheet will form a part of finance cost
which was earlier was part of operating expenses. The figure hereunder shows the effect on
income statement:

Accounting and Financial Reporting 8
Figure 3 Effect on Income Statement
Effects on Cash Flow Statement
IFRS 16 needs a said company to categorize the cash payments for principle portion and interest
portion of lease liabilities under the head financing activities and to other interest paid
respectively. The new lease standard when adopted will increase operating cash outflows and
decrease in financing cash outflows. After applying IFRS interest will also be included
(Pwc.com, 2017).
Effect on Singapore Airlines Limited
All lease contracts under IFRS 16 will be on the balance sheet of the lessee and the estimation
made on the same suggests the change it brings along with will add obligations to the balance
sheets of airlines all over the world (Lavi, 2016). The introduction of IFRS have a greater impact
on Singapore Airlines Ltd if the new lease standard will be adopted in their financial reporting
framework. All leases on the balance sheet will be recognized and resulting it will be accounted

Accounting and Financial Reporting 9
for new assets and liabilities. It will impact on the company’s reported profit, debts, gearing
ratios, EBITDA and return on capital employed. Also when the lease liability will be retranslated
at every reporting date in profit and loss account it lead to increase in demand for lease rentals
and lessors will have to respond on the same (laws, A., fly?, I. and Hong Kong as an aircraft
financing and leasing hub: BEPS, F, 2017). A hypothetical example has been given here under to
show the impact on financial statement of Singapore Airlines Ltd if the company adopt IFRS 16
in their lease accounting.
Figure 4 Financial Statements of Singapore Airline Ltd.

Accounting and Financial Reporting 10
As per the given financial statements the comparability has been shown in between IAS 17 and
IFRS 16. There is an instant increase in lease assets and lease liabilities of the company after
adopting the new lease standard whereas equity has seen a drop after applying IFRS 16 in their
financial reporting. IFRS 16 does not require the presentation of lease assets and liabilities on the
balance sheet. In income statement after applying the lease standard the company sees higher
EBITDA because no expense related to lease are included and operating profit also shown an
increase due to the inclusion of the portion of expenses only. Looking at the profits for the year
there is a slight decrease found out as company hold a portfolio of leases which does not have a
starting and ending in the same year. The impact on cash flow statement is not on the total cash
flows but on the net cash flows from operating activities and financing activities which are
showing an increase after applying IFRS 16. The company has reports interest within the
operating activities (Chen, and Khurana, 2017).
Conclusion
The introduction of IFRS 16 has given a scale of changes in the financial instruments, lease
accounting and the revenues to the listed companies. It has been observed that the new
requirements of the standard brings major changes in the lease accounting requirements and for
those companies who lease their most of the assets in their operations will experience the
increase in their reported assets and liabilities. It affects variety of sectors and in this report the
effect on Singapore Airlines limited has been shown as they have a larger portfolio so the impact
on their financial metrics are greater too.

Accounting and Financial Reporting 11
References
Byard, D., Li, Y., & Yu, Y. (2011). The effect of mandatory IFRS adoption on financial
analysts’ information environment. Journal of accounting research, 49(1), 69-96.
Chen, L. H., & Khurana, I. K. (2017). The Impact of IFRS versus US GAAP on Audit Fees and
Going Concern Opinions: Evidence from US-Listed Foreign Firms.
Cotter, D. (2012). Advanced financial reporting: A complete guide to IFRS. Financial
Times/Prentice Hall.
Ey.com. (2017). Cite a Website - Cite This For Me. Available at:
http://www.ey.com/Publication/vwLUAssets/ey-leases-a-summary-of-ifrs-16/$FILE/ey-
leases-a-summary-of-ifrs-16.pdf [Accessed 15 Nov. 2017].
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[Accessed 15 Nov. 2017].
Hussey, R. (2017, May). Leasing of Assets: A Content Analysis of Comment. In GAI
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Ifrs.org. (2017). Cite a Website - Cite This For Me. Available at:
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analysis.pdf [Accessed 15 Nov. 2017].

Accounting and Financial Reporting 12
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