Ready your IFRS 16 narrative or face a new-year shock

Nordea On Your Mind turned the focus on IFRS 16 in June 2017. Now it's almost here, Johan Trocmé outlines steps you can take to smooth the transition.

Balancing act: IFRS 16 requires companies to change their accounting practices from January 1, 2019 or risk alienating some stakeholders. Source: Zephyr18/gettyimages

When Nordea On Your Mind homed in on the issue of IFRS 16 in the summer of 2017, the theme that underpinned that excellent publication was the need to be ready for new international accounting practice legislation, due to come into place on January 1, 2019.

Perhaps not surprisingly, the advice author Johan Trocmé and his team doled out then is, if anything, even more apposite now. The deadline is after all just over two weeks away.

“It’s evident that some companies, given how resources are limited, did not get their heads around this in the early days,” says Trocmé, director for thematics. “There’s not a great deal of time now for stakeholders to get their narrative in order and explain what will be different when they report next year, as opposed to this year.”

What will be different exactly? The new IFRS 16 reporting standard will, in an effort to boost transparency, force all companies that come under the IFRS (some 150 jurisdictions currently, according to the IFRS Foundation) to start including operating leases on their balance sheets.

“IFRS 16 means that reported debt will likely be higher for companies with major operational leases which are currently reported off-balance sheet,” Trocmé says. In other words, companies with major operating leases will no longer appear asset-light.

“Some companies’ numbers are going to change and there needs to be an explanation in place,” says Stockholm-based Trocmé. “It’s less an issue with institutional or large investors but it could be a different story with retail or small investors.”

Trocmé cites the example of Swedish airline SAS. Airlines, he says, are particularly vulnerable to the new legislation given the standard practice of leasing aircraft, although SAS is most definitely one of those that appears to have done its homework, he adds.

“You need a ‘to-do’ list here,” the NOYM publisher says. “I’m going to make the assumption that your practices are already compliant. But your next financial report should not only include your year-on-year figures, it should also show what it would have been without the accounting changes, a pro forma if you like.”

“In other words, be proactive and give your equity investors an understanding of the change.”

Johan Trocmé, Chief Analyst, Nordea Markets

Narratively speaking: “Be proactive and give your equity investors an understanding of the change,” says Johan Trocmé. Source: Nordea Markets

Related Research:

Nordea On Your Mind – IFRS 16: The return of the leases

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