Just a year ahead of the mandatory effective date of IFRS 16 on leases, our study summarizes the reporting in 2017 year-end financial statements on the progress towards implementation of this standard and its expected impacts.
The study used a sample of 88 European entities (two of which apply the US standard) in various sectors, including finance, with a reporting date at 31 December 2017.
This sample consists of CAC 40, EUROSTOXX 50 and Next 20 entities.
2. Main Lessons
The level of detail and the quality of the information on the introduction of the new standard provided by entities in the sample are very diverse. They range from the bare minimum (mention of the effective date of IFRS 16 and of the launch of an implementation project) to a detailed analysis, passing through a more or less detailed description of the main general principles and the generic impacts of the standard.
However, despite this diversity. the great majority of entities provided rather scant financial information at the end of 2017 as to the implementation of the project and the expected impacts.
Consequently, the 2017 reporting in the sample remains insufficient to an overall appreciation of progress towards introducing the standard, the structuring accounting choices and those requiring judgment, or the expected impact of the standard on the financial statements of these entities.
2.1 IFRS 16 implementation projects are under way
Most of the entities in our sample report that implementation projects have been launched and will continue throughout 2018, generally merely mentioning the year in which the project began. Some also mention the departments involved, or whether preliminary analyses are complete.
Rarely do entities provide specific information about their progress towards the choice of an IT solution to be adopted with a view to IFRS 16 compliance.
Just one of these companies says it has chosen the IT solution it will use in order to comply with the provisions of IFRS 16.
2.2 Few entities have opted for early application of IFRS 16
Only three of the entities in our sample (AIR FRANCE – KLM, ASML and DEUTSCHE POST) clearly state that they have decided to apply IFRS 16 early, with effect from 1 January 2018. The information provided by these companies is as follows:
44% of entities report that they will not apply IFRS 16 early, while the remaining companies in the sample (52%) do not state whether or not they will do so. However, the information reported by these entities suggests that most of them will apply the standard from its effective date.
2.3 Entities leave room for doubt as to the transition method to be used
IFRS 16 offers entities two transitional methods:
- The “full retrospective method”, which consists in restating past periods as if the new standard had always been applied. This method means that the restatement will entail adjusting the opening equity of the earliest comparative period presented (for implementation on 1 January 2019, this would be equity at 1 January 2018); and
- The “modified retrospective” method, which applies the new standard retrospectively from 1 January 2019, the cumulative impacts being adjusted in the opening equity of 2019. Under this method, the 2018 accounts are not restated. This method also offers a number of simplifications than can be used when determining the amounts to be recognized at 1 January 2019.
Hence, the transition method is one of the trickier aspects of the implementation of the new standard on leases, because of the impact of the chosen method not only at the transition date but also on subsequent financial years. There are also considerations regarding the efforts and resources that will be required.
The full retrospective method is much more burdensome and resource-heavy than the modified retrospective approach, which offers options and exemptions all of which may influence the amounts recognized in the financial statements and hence their comparability.
Only 34% of the entities in the sample report that they have chosen their transitional method, but of these, 90% have opted for the modified retrospective method.
2.4 Qualitative disclosures are (almost) always generic
60% of the entities in the sample make no qualitative disclosures, or else report generic information on the broad principles of IFRS 16 (in particular the impacts of the standard on the presentation of the statement of financial position, the profit or loss accounts, the statement of cash flows, or even performance ratios in some cases ).
Some entities (11%) have listed – generally without quantification – the classes of assets that are the subject of leases and which are consequently more likely to be impacted by the new standard. Few entities have provided a company-specific analysis of sensitive subjects such as lease terms, the variability of payments or the discount rate.
2.5 Accounting exemptions and options: entities list the available opportunities
82% of the entities in the sample do not report which options and exemptions they intend to use when applying IFRS 16, whether these are transitional options and exemptions (apart from the choice of transitional arrangements; see above) or those regarding the application of the standard under normal circumstance (short-term contracts, contracts low-value assets, no separation of lease and service components in a contract).
Entities that have reported on the options and exemptions they intend to use when applying IRFS 16 have chosen one or more of the following options:
- application of IFRS 16 at the transition date only to contracts classified as leases under IAS 17 (option offered as part of the two transition methods): five entities;
- valuation of the right of use for the amount of the lease liability (modified retrospective method only): two entities;
- no application of IFRS 16 to short-term contracts (exemption applicable per asset class) and/or to low-value assets (exemption applicable on an asset by asset basis): ten and nine entities respectively; and
- no separation of lease and service components in a contract: three entities.
One entity states that it will use some of the simplifications where they are offered for application contract by contract, while another reports that it intends to make use of some simplifications without saying which.
2.6 At this stage entities are wary of reporting quantified expected impacts
Whereas all the entities will be impacted by the standard, and some sectors will be very significantly affected, only 18% of the entities in the sample clearly state that the impact will be significant, 77% preferring not to address this issue at this stage.
Only three entities (two of which are active in the real estate sector) clearly indicate that the impacts expected as a result of the application of IFRS 16 will not be significant.
Apart from the three entities that say they will apply IFRS 16 early (as of 1 January 2018), three others provide a quantified estimate of the expected impact in terms of lease liabilities recognized on the statement of financial position, while making it clear that these estimates are based on the composition of the lease portfolio at the estimate date, and on calculation parameters that may not be the same at the transition date.