weaver mike

Companies face being "overwhelmed" with the requirements of the new IFRS 16 accounting standard unless they launch their preparation strategies now, industry experts have warned.

The new standard, IFRS 16 – Leases, was issued by the International Accounting Standards Board (IASB) in 2016 and will become effective in less than a year, on January 1, 2019.

The new rules require most operating leases to be recorded on balance sheets, whereas previously only finance leases were recognized.

Duff & Phelps, the global valuation and corporate finance advisor, says that for several industries, such as retail, real estate, airline, transport and energy, this could well become one of the most material items on their balance sheets, with a large-scale impact on earnings before interest, taxes, depreciation and amortization (EBITDA).

It cautions that there are numerous corporations at risk of being caught unprepared for the challenge of implementing the impending changes.

The airline industry will be particularly affected, according to research from Europe Economics, with nearly one-third of companies potentially seeing an EBITDA impact above 100%.

The retail industry will also see considerable impact, with the same research predicting that approximately 37% of companies will have an EBITDA impact of 50% and above.

In addition to the impact on balance sheets, IFRS 16 may cause significant changes to profit and loss and cashflow statements, along with EBITDA metrics and credit ratios.

Duff & Phelps cautions that, as a result, it may have a considerable effect on market sentiment, share prices, analyst coverage and even credit ratings in some industries.

For entities with significant operating leases, the impact may be substantial, so it is crucial they start preparing for adoption as soon as possible, Duff & Phelps executives say.

Companies should already be evaluating the impact of transition options and practical strategies not just on their financial statements, but also on the internal systems required to track the wealth of new data required for each lease.

Michael Weaver, managing director of UK and Middle East valuation advisory practices at Duff & Phelps, said: “With less than a year until these new standards of reporting are enforced, companies face being overwhelmed by additional requirements unless they start preparing a strategy now. Firms with large numbers of operating leases, from retailers to airlines, are especially in the firing line.

“The first step will be understanding the scope of change approaching, and anticipating the effects on balance sheets, cash flow statements and beyond. From there, it will be a case of preparing comparatives and aiding a smooth transition. Those with a laissez-faire approach to implementation risk losing out.”

Duff & Phelps provides a range of services, including regulatory consulting, and has more than 2,000 employees in offices throughout the world.

* Overview of IFRS 16