What are the new IFRS16 leasing standards?

New leasing standards come into effect next year which aim to increase transparency within financial reporting, but a quarter of manufacturers are not prepared for the change which will impact key performance ratios, a new survey has found.

The leasing standard IFRS 16 which comes into effect for periods commencing on or after 1 January 2019 will require companies that use leasing, hire purchase or rental arrangements as a financing solution to recognise new assets and liabilities on the balance sheet.

Why do these standards affect manufacturers particularly?

Businesses that have large assets on long term leases will be particularly affected because the new standard eliminates off balance sheet accounting by lessees in respect of their operating leases. This will therefore have a major impact on many manufacturing businesses who may have assets such as buildings or machinery.

A new YouGov survey of middle market businesses commissioned by RSM found that 25 per cent of the manufacturers surveyed confirmed that they were not prepared for IFRS 16. This is a worrying statistic for a sector where these impending standards could have such a profound affect on key performance ratios and therefore on multiple stakeholders.

What do manufacturers need to do?

Software may need to be adapted or replaced to deal with the new accounting requirements and transition could affect the cost of financing, covenants and credit ratings. 

Manufacturers must identify which key performance ratios will be affected and engage with stakeholders, including lenders, to effectively manage the transition. Assessing their own accounting software and reporting tools to ensure compliance with the new disclosure requirements should also be high on the priority list along with revisiting existing lease agreements to understand and assess the potential impact that they may have on the business going forward. 

For more information on IFRS16, please get in touch with Mike Thornton.

RSM is a category partner in the Future Manufacturing Awards.