IFRS 16 – Short-term rental a better option than leasing?

On the first of January 2019 the new IFRS 16 accounting standards on leases will take effect. Due to new regulations, the International Accounting Standard Board will require listed companies to include, not only financial leases, but also operational leases on their balance sheets as assets. However, the new rules will apply only to leases, which means contracts that are taken out for longer than a year. This is a great opportunity to take another close look at your lease and/or rental contracts.

From 1 January 2019, listed companies will be required by IFRS 16 to include operational leases in their balance sheets. This duty won’t apply to small businesses, but it may be desirable to comply if a business is part of a larger listed parent company. From  hence forth, the key distinction will no longer be ‘financial’ vs. ‘operational’ – it will be ‘lease’ vs. ‘service’. If the contract is an identifiable asset, then it must be included or activated? in the balance sheet as a lease.

WHAT IMPACT WILL IFRS 16 HAVE ON YOUR ORGANISATION?

Now that preparations for the implementation of IFRS 16 regulations are probably in full swing within your company, it would be wise to take another good look at all your lease contracts. Not only existing lease, but also new contracts to be taken out this year or in 2019.

1. Thinking about new lease contracts? Opt for the benefits of short-term rental!
systems is one of the few parties in the market that offers short-term rentals of enterprise server, storage and networking infrastructure systems or solutions. Short-term contracts of 1 year or less are not covered by IFRS 16 and don’t have to be included in the balance sheet as an asset.

2. Prefer a longer term lease contract? Then take it out this year!
For new and existing contracts of longer than a year taken out before 2019, it’s possible to rely on the so-called ‘grandfathering clause’. This exclusion clause makes it possible to keep contracts taken out in 2018 or earlier off the balance sheet, even if the new rules would otherwise require them to be included as assets. If these contracts are changed in 2019 then the grandfathering clause will cease to apply and IFRS 16 will require them to be included in the balance sheet after all.

3. What happens if a short-term contract is extended after a year?
If the extension could not have been predicted in advance, it will probably be permissible to extend the contract without having to incorporate it in the balance sheet. This is simply because when you opt for a rental solution for an urgent issue or a project, it’s not always possible to guess in advance whether the contract term will be longer than a year. If it’s clear when you take out the contract that it will need to be extended after a year then the rules are stricter. Talk to your accountant to find out about the possibilities.

4. Is the value of individual assets in the lease contract below USD 5,000?
In that case you can also rely on an exclusion clause and you won’t need to include the operational lease in the balance sheet.

5. Doubting what you should do? Got any questions?
Call your rental specialist at IRENT on + 31 (0) 33 789 01 01.

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