IFRS 16 and Its Impact on Financial Reporting and Tax Planning

This report examines the implications of IFRS 16, the new international accounting standard for leases, which took effect on January 1, 2019. Authored by Aletta Boshoff, National Leader, IFRS Advisory and Partner at BDO, the report highlights the significant changes brought about by IFRS 16, including the elimination of off-balance sheet benefits of leasing and the requirement for lessees to recognize a lease liability and a corresponding right-of-use asset. The report emphasizes the need for entities to consider a wide range of issues when adopting IFRS 16, such as the impact on financial statements, dividend declarations, bank covenants, and tax planning. It outlines key areas where complex issues typically arise, including identifying leased assets, determining lease terms, and assessing the impact of the new standard. The report also discusses the potential consequences for management accounts, forecasts, strategies, and agreements based on profit or EBITDA. It cautions that changes to accounting policies may affect a company's cash tax, income tax expense, and deferred tax. It also highlights the importance of considering how IFRS 16 may impact tax provisions, and the need to manage tax charges or maximize reliefs due to transitional adjustments. The report underscores the importance of understanding the standard and its implications to ensure compliance and optimize financial outcomes.

17/09/2019 IFRS 16 prepares for a new lease of life | CA ANZ
https://www.charteredaccountantsanz.com/news-and-analysis/news/ifrs-16-prepares-for-a-new-lease-of-life 1/4
We and our partners use cookies
to give you the best experience
of our website. By using this
website you agree to the use of
cookies for analytics,
personalised content and
advertisements. To learn more
about how we use cookies and
other online technologies visit
our Privacy Policy .
✓ Accept Cookies
DATE POSTED: 16/09/2019 5 MIN READ
IFRS 16 on track for a new lease of
life
The new standard on leases, IFRS 16, will impact your busin
but do you know how? Aletta Boshoff, National Leader, IFRS
Advisory and Partner at BDO delves deeper.
   
• The new leasing standard IFRS 16 took effect on 1 January 2019.
• Entities need to consider a wide range of issues, from how their accounting syst
will handle the changes to tax impacts.
• Transition to IFRS 16 may even give rise to potential tax planning issues.
IN BRIEF

17/09/2019 IFRS 16 prepares for a new lease of life | CA ANZ
https://www.charteredaccountantsanz.com/news-and-analysis/news/ifrs-16-prepares-for-a-new-lease-of-life 2/4
Aletta Boshoff, National Leader, IFRS Advisory and Partner at BDO, says the effects
adopting the new leasing standard, IFRS 16, Leases, should be considered now so t
entities can take any remedial action and deal with any potential planning issues.
Under the standard, the off-balance sheet benefits of leasing will be all but eliminat
"The International Accounting Standards Board (IASB) has fundamentally changed t
financial reporting landscape for how lessees account for operating leases, with the
introduction of IFRS 16 Leases," Boshoff notes.
Entities need to consider how to prepare their financial statements using this new
accounting standard. The changes can be complex and can have effects beyond jus
accounting.
"When adopting IFRS 16, including deciding which transition route to apply, membe
need to consider the commercial and practical impacts of the changes in accountin
Boshoff says. "The choices you make will affect the way the performance of your bu
is measured and reported, and it is vital to consider not only the commercial and pr
issues, but also any tax impact of these changes."
As a guide, Boshoff recommends addressing some key issues, including how the en
ability to declare dividends will be affected, whether bank covenants will be affecte
how financial results (profit before tax) and financial position (liabilities) will be
impacted.
"The new standard effectively removes the operating lease
classification, and requires all lessees to show a lease liab
corresponding right-of-use asset for all leases."
— Aletta Boshoff, Partner, BDO

17/09/2019 IFRS 16 prepares for a new lease of life | CA ANZ
https://www.charteredaccountantsanz.com/news-and-analysis/news/ifrs-16-prepares-for-a-new-lease-of-life 3/4
On a practical level, entities need to consider which processes and systems will nee
changing to accommodate IFRS 16. "Is there a technology solution to implement at
date of adoption and for ongoing lease management, and will staff training be requ
let alone training for finance teams and executives and directors?" Boshoff asks.
In addition, Boshoff says members should ask which wider business planning activit
be affected and how current agreements will be affected.
In transitioning to IFRS 16, members need to weigh up a variety of commercial
considerations. As a guide, Boshoff says there could be consequences associated w
reported earnings and balance sheet presentation – as well as consequences for
management accounts, forecasts and strategies.
"Agreements that are based on profit, EBIT or EBITDA such as debt covenants,
management agreements, remuneration and share-based payment schemes could
the impact," she adds.
Checklist of complex issues
Boshoff has identified just a few of the areas in which complex issues will typically a
with the adoption of IFRS 16. These include:
• identifying which assets are held by way of a lease
• determining whether an arrangement meets the definition of a "lease" in IFRS 1
• deciding the appropriate lease term, including option periods, when calculating
value of the right-of-use asset
• identifying the potential impacts of adopting IFRS 16.
"Any changes to accounting policies may have an impact on a company's cash tax,
tax expense, and deferred tax in the year of change and over future years," caution
Boshoff.

17/09/2019 IFRS 16 prepares for a new lease of life | CA ANZ
https://www.charteredaccountantsanz.com/news-and-analysis/news/ifrs-16-prepares-for-a-new-lease-of-life 4/4
In addition, certain tax provisions (such as thin capitalisation and the taxation of fin
arrangements provisions) rely on accounting standards for their application. "The a
of IFRS 16 may impact how leases will be structured and accounted for and may giv
to potential tax planning issues," Boshoff notes.
To achieve the best outcome, Boshoff says entities should be considering a range o
such as the effect on cash tax of choosing one lease arrangement over others, and
manage tax charges or maximise reliefs due to one-off transitional adjustments.
"It is also necessary to identify transaction types that may cause issues in determin
entity's taxable profit," cautions Boshoff. "In particular, taxpayers subject to the thi
capitalisation provisions will need to understand the effect of the provisions in their
maximum allowable debt calculation."
Search related topics
R E P O R T I N G S T A N D A R D SP R E P A R I N G F I N A N C I A L S T A T E M E N T SA C C O U N T I N G S T A N D A R D S
Get to know IFRS 16 Leases
Aletta Boshoff will be speaking at Australian Accounting Conference 2020.
FIND OUT MORE