Advance Financial Accounting: IFRS 16 and its Requirements

This report delves into the intricacies of IFRS 16, the new international financial reporting standard established by the IASB, focusing on lease accounting. It outlines the standard's core objective: to provide accurate and transparent reporting of lease transactions. The report details the key requirements for both lessees and lessors, emphasizing the shift to a single lessee accounting model where almost all leases, particularly those exceeding 12 months, are recognized on the balance sheet. It contrasts this with the previous IAS 17, which distinguished between finance and operating leases. The report also examines the effects of IFRS 16 on financial statements, including changes in balance sheets, income statements, and cash flow statements. It provides an analysis of the impact on key financial ratios and performance metrics. Furthermore, the report explores the specific effects of IFRS 16 on Great Eastern Holdings Ltd., an insurance company, highlighting how the new standard will influence its financial reporting practices, especially regarding operating lease commitments. The report concludes by summarizing the overall impact and importance of the new lease standard.

Running Head: ADVANCED FINANCIAL ACCOUNTING
ifrs 16
The new lease standard

Advance Financial Accounting 1
Contents
Introduction...........................................................................................................................................2
IFRS 16 and its Requirements...............................................................................................................2
Lessee................................................................................................................................................2
Lessor................................................................................................................................................3
Changes in accounting environment......................................................................................................3
Lessee Accounting.............................................................................................................................3
Lessor accounting..............................................................................................................................4
Effects on financial statements..............................................................................................................4
Effects on Great Eastern Holdings Ltd..................................................................................................5
Conclusion.............................................................................................................................................6
References.............................................................................................................................................7

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Introduction
IFRS 16 is an International Financial Reporting Standard, developed by IASB (International
Accounting Standard Board). This standard provide the guidelines for the lease accounting. The
main motive of the standard is to report that data which shows the accurate information about the
lease transactions ("IFRS", 2017). It introduces a single lessee accounting model and requires that
all the leases should be reported on the balance sheet and the lessee has to recognize all the assets
and liabilities for almost all leases with a period of more than 12 months. Once applicable, it will
replace IAS 17 ("IFRS 16 — Leases", 2017).
Great Eastern Holdings Ltd. was founded in 1908, is a life insurance group in Singapore and
Malaysia. It is the oldest insurance company in Asia listed on Singapore Exchange. It provides
services like banking, insurance and asset management. The mission of the company is to provide
financial security to its clients ("Great Eastern", 2017). This report is about the requirements of the
new lease standard for the lessee and lessor. It also explains the effects of IFRS 16 on the Great
Eastern Ltd.
IFRS 16 and its Requirements
The new standard for lease was published by IASB in January 2016 and will come in effect from
January 1, 2019. It defines the principles for the measurement and disclosure of the leases. The
companies who have applied for IFRS 15 Revenue from Contracts with Customers can choose to
apply for IFRS 16 before its effective date. The main objective of IASB to introduce this new
standard, is to improve the financial reporting of lease. Under IFRS 16, a leases is defined as a
contract that provides right to the customer (“lessee”) to use an asset for a particular period of time
in exchange of some consideration. The requirements of the definition of lease has also changed
from those in IAS 17. The new standard brings a significant change in the approach and will effect
several industries. The enterprises which will be mainly affected by IFRS 16 are retail and
consumer, telecommunications, banking and financial institutions, metals and mining, oil and gas
and insurance entities. Once the new standard became effective, it will replace the old standard of
lease that is IAS 17. It will eliminate the classification of leases as financial lease and operating
lease and all of them are treated in a similar way ("IFRS 16 Leases | Deloitte UK", 2017).
Lessee
As the new standard provide a single lessee accounting model, the lessee is required to:
 Recognize assets and liabilities of most of the leases with a time period of more than 12
months. The exemption is provided for assets having low value.
 Separation of the depreciation charged on lease assets from the interest on lease liabilities.
Previously, according to the IAS 17, the focus was mainly on identifying the finance lease that is
required to be reported in the balance sheet. The lease which is economically similar to the
purchasing of a leased asset is considered to be finance lease. All the other leases were termed as
operating leases and were not required to be shown on balance sheet. They were known as off
balance sheet leases. Now, as per IFRS 16, lessees are require to report all the leases on their
balance sheet, irrespective of the industry in which the entity works. The whole accounting
treatment of leases done by lessees will change fundamentally. It will completely remove the
current dual accounting model which distinguishes between the on balance sheet leases and off
balance sheet leases.

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Another requirement for the lessee is to separate lease components and the non-lease components
of their contracts. After identifying the components, they are require to provide consideration for
each component. Lessees who do not make an accounting policy election are required to allocate
the consideration to the separated components on the basis of standalone selling price ("IFRS 16:
The leases standard is changing", 2016).
Lessor
The requirements for the lessor, stated under IFRS 16 are same as to IAS 17. The classification of
leases is done in the similar way that is operating and finance leases by the lessor in order to report
them differently. The requirements of lessor accounting are not fundamentally changed like those
of lessee accounting.
Changes in accounting environment
Implementation of IFRS 16 has brought number of changes in the accounting environment of
leases. It brings dramatic changes in the balance sheet of lessees, whereas lessor accounting is
slightly changed.
Lessee Accounting
According to the new standard, lessee are required to do the initial recognition of the lease liability
for which the lease payment has to be made. They are also required to recognize the right-of-use
asset to use the underlying asset for the lease. After recognition, the lease liability and right-of-use
asset are being measured. A lessee measures the liability of lease at the present value of future lease
payments. The payments include, fixed, non-cancellable payments, variable lease payments,
residual value guarantees, the price of a purchase option which is to be exercised by lessee and
penalties for termination options. The measurement of right-of-use asset is based on the amount of
lease liability, with the adjustments for the prepayments, lease incentives received and initial direct
cost incurred ("IFRS 16 LEASES FACT SHEET", 2017).
While doing the subsequent measurement, the lessee accounted the lease liability like a financial
liability through the use of effective interest method. The accounting for right-of-use asset is done
similarly to the accounting of a purchased asset and it is depreciated as per the requirements of
depreciation of IAS 16. After doing the recognition and measurement, the lease liability and asset is
presented in the financial statement of lessee. The right-of-use assets are either shown separately in
the balance sheet or are disclosed in the notes and the similar presentation of the lease liabilities is

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done. Expenses related to depreciation and interest are shown separately in the income statement.
Payments of lease liabilities are presented in financing activities in cash flow statement and interest
payments are presented on the basis of accounting policy election in compliance with IAS 7.
Lessor accounting
The accounting of lessor is not changed under the new standard. It remains the same from current
accounting in IAS 17. Lessors classify all the leases as per the classification mentioned in IAS 17
and categorize the leases in operating and finance leases. In operating lease, the lessor continues to
recognize underlying asset and for finance lease, lessor derecognize the underlying asset and
recognize a finance lease receivable according today’s requirements (2016).
At time of subsequent measurements:
Operating lease: lessor measure the income from lease on straight-line basis or on another basis
which shows a reduced benefit derived from the use of underlying asset.
Finance lease: for the accumulation of the net investment in lease, lessor measures the interest
income and reduce that investment for the received payments.
Effects on financial statements
Figure 1: Effects on Financial Statements (Source: "IFRS 16 Leases Road map", 2016)
Implementation of IFRS 16 will majorly affect the balance sheet and income statement of the
lessee. As per the requirements of the new standard, lessee have to show all the liabilities and the
supported assets related to operating leases on-the balance sheet except from those leases which are
for the period of less than 12 months and the lease assets are of low value. As a result, there will be
a significant increase in the assets and liabilities of the lessee company which will eventually
reduce its equity. On the top of that, the company’s income statement will show an interest expense
and a depreciation charge on the lease assets in place of annual rental cost. All this will lead to an
increase in the earnings before income, tax, depreciation and amortisation (EBITDA) and earnings
before income and tax (EBIT) of the company as compare to the previous standard IAS 17
accounting. The interest expense calculated will be higher at the beginning of the lease contract and
will decline later on as and when payments are made and the depreciation is charged on straight
line basis. This reflects a profile of front loaded cost, which means that there should be little or no
impact on the profit during the life of an individual lease. Like IAS 17, the profit will remain stable
under IFRS 16 ("Ex ante Impact Assessment of IFRS 16", 2017). The new standard will also affect

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the cash flow statement of the company. As such the cash outflow will have no impact, but the
structure of cash flow statement changes. The net cash flow generated from financing activities
decreases and with the same amount the cash flow from operating activities increases. The below
table shows the changes in EBITDA, EBIT and in the profit margin of the different industries
sector, after the implementation of IFRS 16. Hypothetical values are been taken to show the
comparison between the reporting under IAS 17 and IFRS 16. As it can be seen that the sectors
which are highly affected by the new standard are Airlines, Retail and travel and leisure sectors.
While other sectors like healthcare, information technology are slightly affected (Lavi, 2016).
Figure 2: Impact of IFRS 16 (source: "IFRS 16 Leases", 2016).
The key financial ratios and performance metrics will also have impact of IFRS 16. Ratios like
gearing, asset turnover, interest coverage, EPS, ROE, ROCE, current ratio, operating profit and
operating cash flows are affected. Performance metrics like EBIT, EBITDA, will increase without
any changes in the underlying cash flows. Overall, the financial statements of the entities working
in different industries will be majorly affected by the adoption of the new lease standard IFRS 16.
Effects on Great Eastern Holdings Ltd.
The new lease standard IFRS 16 has affected many companies working in different industry
sectors. The majorly affected are airline industry, retail sector, telecommunication, banking and
other financial institutes, oil and gas. While other companies like insurance and health care have a
minor impact on their financial statements. As it is already discussed that the accounting for
operating lease has been changed under IFRS 16 for the lessee, so the companies who takes assets
on the basis of operating lease has to make major changes in its final accounts.
As far as Great Eastern Holdings ltd. Is concerned, it is an insurance company operating in
Singapore and Malaysia. The company provides services like banking and insurance to its
customers. For preparing its financial statements, the company follow the guidelines and the
provisions of Singapore Financial Reporting System. The accounting of leases is done under FRS
116, whose provisions are same as IAS 17. The policy adopted by the company regarding leases is,
as a lessor, the accounting of rental income derived from operating leases is done on straight line
basis and as a lessee, the lease payments are been reported as an expense in the income statement
on straight line basis. If the company adopts IFRS 16, it will have to prepare its final accounts
according to the provisions under the new lease standard. Being a lessor, the company may follow

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the concepts of IAS 17 for doing the lease accounting. But when working as a lessee, it has to make
certain changes in its financial reporting.
Figure 3: Operating lease commitments (source: "Annual Reports", 2016).
As it can be seen above that, when the company entered into operating lease agreement for
commercial property, it has a total of $73.1 million lease payment under non-cancellable operating
leases in the year 2016. When it entered in the lease agreement for computer equipment, it has
$21.5 million payments payable under non- cancellable operating leases. Both the values are not
reported in the balance sheet of the company as liabilities and are shown in notes to accounts
("Annual Reports", 2016). As per the requirements of IFRS 16, the lessee has to show all the
leases and their supported assets in the balance sheet as financial lease. This means the operating
leases which is shown in balance sheet will be changed and the liability of $73.1 million and $21.5
million has to be recognized on the balance sheet. All the off balance sheet items will be eliminated
and the operating expenses will be replaced with finance cost in profit and loss account. Adoption
of new lease standard can also affect capital adequacy. Covenants, credit ratings and borrowing
costs.
Conclusion
From the above report, it can be concluded that the IFRS 16 has laid the new requirements which
will change the procedure of accounting for leases, especially for operating leases. It will remove
the classification of operating and finance lease and would provide a single accounting model. The
report explains that the lessee companies will be majorly affected by the implementation of IFRS
16 as they have to change their policies regarding the accounting of leases. Overall, the new lease
standard will replace the IAS 17 and will provide accurate information about the leases.

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References
IFRS 16 — Leases. (2017). Iasplus.com. Retrieved 13 November 2017, from
https://www.iasplus.com/en/standards/ifrs/ifrs-16
(2016). KPMG. Retrieved 14 November 2017, from https://www.in.kpmg.com/ifrs/files/first-
impressions-leases-IFRS16.pdf
Annual Reports. (2016). Great Eastern, Singapore. Retrieved 15 November 2017, from
https://www.greateasternlife.com/sg/en/about-us/investor-relations/annual-reports.html
Ex ante Impact Assessment of IFRS 16. (2017). Efrag.org. Retrieved 15 November 2017, from
https://www.efrag.org/Assets/Download?Asseturl=%2Fsites%2Fwebpublishing%2fsiteassets
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Great Eastern. (2017). Great Eastern, Singapore. Retrieved 13 November 2017, from
https://www.greateasternlife.com/sg/en/about-us.html
IFRS 16 Leases | Deloitte UK. (2017). Deloitte United Kingdom. Retrieved 15 November 2017,
from https://www2.deloitte.com/uk/en/pages/audit/articles/ifrs-16-leases.html
IFRS 16 LEASES FACT SHEET. (2017). Cpaaustralia.com.au. Retrieved 14 November 2017, from
https://www.cpaaustralia.com.au/~/media/corporate/allfiles/document/professional-resources/
reporting/factsheet-ifrs16-leases
IFRS 16 Leases Road map. (2016). Ey.com. Retrieved 15 November 2017, from
http://www.ey.com/Publication/vwLUAssets/ey-leases-a-summary-of-ifrs-16/$FILE/ey-leases-a-
summary-of-ifrs-16.pdf
IFRS 16 Leases. (2016). Ifrs.org. Retrieved 15 November 2017, from
http://www.ifrs.org/-/media/project/leases/ifrs/published-documents/ifrs16-effects-analysis.pdf
IFRS 16: The leases standard is changing. (2016). Pwc.com. Retrieved 15 November 2017, from
https://www.pwc.com/gx/en/services/audit-assurance/assets/ifrs-16-new-leases.pdf
IFRS. (2017). Ifrs.org. Retrieved 15 November 2017, from
http://www.ifrs.org/issued-standards/list-of-standards/ifrs-16-leases/
Lavi, M. R. (2016). The impact of IFRS on industry. John Wiley & Sons.
Morales-Díaz, J., & Zamora-Ramírez, C. (2017). Effects of IFRS 16 on Key Financial Ratios: A
New Methological Approach.

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Singer, R., Pfaff, A., Winiarski, H., & Winiarski, M. (2017). Accounting for Leases under the New
Standard, Part 1 - The CPA Journal. The CPA Journal. Retrieved 14 November 2017, from
https://www.cpajournal.com/2017/08/23/accounting-leases-new-standard-part-1/