The key objective of IFRS 16 and IAS 17 before it, is to improve comparability and transparency of Financial Statements. As referenced in earlier posts in this series, historically, operating leases for right-of-use assets would remain as a P&L transaction only. By including these as assets and associated financial liabilities, some businesses, where many or large operating leases are used, could see a significant impact on both the balance sheet and consequently the significance of different lines on the P&L.

An increase in non-current assets representing the value of the leased items and an increase in financial liabilities reflecting the present value of the payments due will have an immediate impact on many key metrics such as asset turnover, equity and operating expenses each of which are likely to fall. In parallel to these, metrics which will rise include liabilities in the form of increased debt, recorded assets and EBITDA.

Practical impacts of the change in these metrics could include the potential for breaches of covenants with banks, in contracts and finance agreements. These will require careful management in disclosure and communication with business partners. Additionally, internal impacts could include changes in performance KPIs with potential for changes in compensation payments through payroll or other bonus awards.

More detailed information can be found on the IFRS Impact on Financial Statements and reporting metrics in this useful PwC paper including impact on different industries