Introduction
Business transactions and record keeping are critical processes in every business organization. Different agencies present powerful guidelines that accountants should take into consideration. This strategy increases the level of standardization, thereby making it possible for different stakeholders to make informed decisions. The purpose of this essay is to give a detailed analysis of the International Financial Reporting Standard (IFRS) 16.
Analysis and Difference
IFRS 16 describes how an IFRS accountant or reporter will measure, recognize, and disclose leases. According to this standard, every lessee should recognize liabilities and assets for all items within 12 months or more. It continues to identify or classify any lease under these categories: finance and operating (“IFRS 17 – Leases”). This guideline is applicable to all annual reporting practices pursued from January 2019.
This framework is quite different from earlier guidelines since it ensures that lessees recognize that they have a right-of-use asset (“IFRS 17 – Leases”). This will be measured by calculating the lease amount plus any additional cost the lessee incurs. A cost model is selected to measure the asset’s right-of-use. This model is a transition from IAS 17 since lessees do not have the application processes required under IAS 8. A modified retrospective framework is presented whereby accountants do not have to restate comparative periods (“IFRS 17 – Leases”). This means that the introduction of IFRS 16 is a new opportunity for companies to adjust their opening balances and equities accordingly.
Impact and Reasons for Implementation
The introduction of the IFRS 16 has significant impact on the field of business. The first one is that the number of leased assets that have to be considered in accounting books will increase. The second impact is that financial liabilities captured in balance sheets will increase significantly. This will eventually result in a higher corporate valuation (Krimpmann 36). The first reason for the introduction of the IFRS 16 is to recognize lease transactions honestly. The second one is that it is a basis through which accountants and users of different records can assess the uncertainty, timing, and amount of leases’ cash flows.
Difference with IFRS 13
IFRS 13 differs significantly from IFRS 16 since is revolves around the issue of fair value disclosures and measurements. This guideline defines or pursues fair value based on the notion of exit price. This is achieved through the use of fair value hierarchy (Krimpmann 56). This means that it will result in a market-based value measures for acquiring or transferring assets. Unlike IFRS 16 which focuses on leases, IFRS 13 principles are implemented to maximize comparability in fair value measurements while at the same time improving consistency. Another unique aspect is that IFRS 13 fails to determine when a specific liability, asset, or entity’s own equity was measured at the specified fair value. Finally, both IFRS 13 and 16 would be used together in an attempt to streamline and guide all accounting procedures.
Conclusion
The above discussion has identified the IFRS 16 as a superior model for dictating the way IFRS accountants identify and report leases. It is a new framework that ensures that leases are taken into consideration since they tend to have significant implications on the financial position on any business. Although it differs from the IFRS 13, the two work synergistically to streamline accounting practices and improve the nature of reporting.
Works Cited
“IFRS 17 – Leases”.Deloitte, Web.
Krimpmann, Andreas. Principles of Group Accounting under IFRS. John Wiley & Sons, 2015.