Landlords and Tenants need to understand the impact.
Compliance with the new standard is not required until 1 January 2019 but it is important for Landlords and Tenants to give proactive consideration to the implications of the requirements now.
Under IFRS 16, the distinction between finance lease and operating leases will disappear and all leases will be treated in the same manner. This new treatment is broadly similar to that currently seen for finance leases, so Tenant companies will need to recognise an asset (being their right to use the underlying asset) and a liability (their obligation to pay for that asset) on their balance sheet.
From 2019 full liabilities under real estate leases will need to be shown on the Tenant’s balance sheet. The new regime will also have an impact on a Tenant’s reported profit in its accounts.
Tenants may seek to limit the impact on their balance sheet by pushing for shorter leases. The new regime does not recognise Tenant break rights as a way to limit the liabilities on a balance sheet unless that break right is more likely than not to occur.
Additionally, it is possible Tenants may seek longer rent-free periods instead of other incentives and Landlords are likely to face increasing pressure for shorter lease terms.
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