What is IFRS 16? What Changed After January 2019?

What is IFRS 16?

IFRS 16 is the international accounting standard for lease reporting, introduced in January 2019 to replace older standards like IAS 17. Its purpose is to bring greater transparency by requiring companies to record almost all leases on their balance sheets. Previously, businesses could classify many leases as operating leases, keeping them off their financial statements. Now, with IFRS 16, they must recognize a "right of use" asset and a lease liability for nearly all leasing agreements.

What Changes Does It Bring?

Before IFRS 16, companies had two types of leases:

• Finance leases, which were already recorded on the balance sheet.
• Operating leases, which were only recorded as rental expenses in the income statement.

Under IFRS 16, the distinction between finance and operating leases is eliminated. Companies now:

• Report leased assets as if they were owned.
• Recognize a liability for future lease payments.
• Split lease expenses into depreciation (of the asset) and interest (on the liability) instead of recording them as a single cost.

What Does This Mean for Your Company?

Financial metrics like EBITDA  may appear stronger since lease expenses are no longer fully deducted from operating income. However, your company will now show higher liabilities, affecting debt ratios. If your business relies on leasing (retail chains, logistics companies or medical equipment), this change has a significant impact.

For example, if you are a retail company leasing multiple stores, you are used to reporting only rent expenses in your profit and loss statement. Under IFRS 16, your company must now list these leases as assets and liabilities, making its financial position look different to investors and lenders.

Similarly, If you’re a telecom company renting cell towers or data centers, these will now be recorded as assets on the balance sheet and the total lease payments must also be reported as financial liabilities. This makes your company’s financial commitments more visible to investors and lenders.

Why Would You Need SAP RE-FX for IFRS 16?

Handling lease accounting manually under IFRS 16 is complex, especially for companies with hundreds or thousands of lease agreements. This is where SAP RE-FX (Real Estate Management in SAP) becomes essential.

How can SAP RE-FX help you::

• Automates lease compliance: Simplifies the lease accounting process, reducing manual effort.
• Ensures accurate reporting: Automatically calculates lease liabilities and right-of-use assets.
• Streamlines lease management: Easily handles lease modifications, renewals, and terminations.

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