New Airline Accounting Standard IFRS 16

Are you aware of new accounting guidelines for income statements and balance sheets under IFRS 16?

The airlines industry will be hugely impacted under IFRS 16 – the new guidelines to replace IAS 17 published by the International Accounting Standard Board (IASB) in January 2016. The main changes under IFRS 16 relate to how leases are treated on companies’ balance sheets and income statements. As the majority of airlines lease assets, it’s crucial they familiarize themselves with this new accounting standard due to come into effect from January 2019.

Under IFRS 16, what will be the main changes to a company’s balance sheet?

• IFRS 16 ends the classification of leases as either operating leases or finance leases for a lessee.
• According to the new standard, all leases are treated in a similar way to finance leases applying the IAS 17 guideline.
• Leases are capitalized by acknowledgment of the current value of the lease payments and showing them either as lease assets or as property or equipment.
• If lease payments are made over time, the financial liability is charted and future lease payments are included.

What will be the main effect of IFRS 16?

• The main effect of the new requirements will be a significant increase in lease assets and financial liabilities.

What are the main benefits of IFRS 16? 

• It’s beneficial because companies will be better able to determine whether a given contract is a lease or a service one and how it should be reflected in financial statements.

• It will result in a more realistic image of a company’s assets and liabilities and more transparency around a company’s financial leverage and capital employed.

• It will also provide a broader representation of data than was available under IAS 17, thereby giving superior insight into a company’s operations.

• It will provide more industry transparency regarding leases as companies will measure assets and liabilities arising from leases more accurately.

• Finally, it will facilitate more effective capital allocation by enabling better credit and investment decision-making by companies and investors.

More details on IFRS 16 in future posts.

For more information, please see http://www.ifrs.org/