By Christian P. Mendoza
Conclusion
Financial reporting is greatly affected by the change in leases standard because this will involve a transitional challenge. Some of the existing lease agreements shall be evaluated and determined if they still fall under the scope of the newly issued International Financial Reporting Standard 16 on “accounting for leases.” Companies, in order to be fully compliant with IFRS 16, shall involve themselves in process automation, which further involves investments in huge sums of money.
Another tricky financial reporting aspect of the new standard is the revision of the assessment of the ongoing policies applicable to operating leases. Since under IFRS 16, the recognition of an asset and a liability specifically provided by the standard is required, some companies may tend to have difficulty in assessing their preexisting operating lease agreements. This will entail judgment on their part and may greatly affect the financials of the company.
Lastly, IFRS 16 may cause ballooning of liabilities in the balance sheet. This may result to different opinions and perceptions among entities and their investors. Key management personnel may get into the situation by manipulating the liabilities portion of their balance sheets, which, therefore, may result to more financial reporting problems and even issues on compliance and lawsuits.
Meanwhile, it is not just the International Accounting Standards Board that issued a radical change in its leases accounting. In the US, an evident change in the balance sheets, particularly in the liabilities section, was ascertained. The US Securities and Exchange Commission led the overhaul of the new standard, which redefined the manner of reporting lease commitments. According to the web site payments.com, these new leases standards caused the liabilities of some companies to significantly increase. Fast food giants Mexican Grill Inc. and McDonald’s Corp. had seen their liabilities tripled and grew by one-third, respectively. Meanwhile, department store company Nordstrom had observed that its liabilities increased by 25 percent. Other companies that saw significant growth of their liabilities are The Cheesecake Factory, Kohl’s, Best Buy and JCPenny.
A change in an accounting standard is inevitable. It is the duty of the standards-setting boards to promulgate rules that will keep up with the growing demands and continued changes in the financial reporting aspects of businesses. And with the issuance of IFRS 16, companies are expected to view the change to be a challenge for their financial reporting and for the entire company as well. The fact that financial reporting provides for the overview and the face of business cannot be simply neglected. However, to provide for such image, a company shall follow the regulations and standards applicable to maintain its reputation and stature in the corporate world. With this, following the revised lease standards is a must.
Christian P. Mendoza is a Certified Public Accountant working as a Tax Advocacy Associate at Reyes Tacandong and Co. He is currently pursuing his Master Studies in Accountancy at the De La Salle University.
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