Retailers need to prepare for radical change with IFRS 16

In our latest Audit Insights: Retail report, auditors warn that retailers’ balance sheets will be radically transformed by the new international accounting standard IFRS 16 Leases.

IFRS 16 will apply to accounting periods beginning on or after 1 January 2019. Our report aims to help retailers and external users of their accounts understand some of the challenges that will arise and the important issues that they need to address as the new standard is implemented.

Key challenges to consider

Under IFRS 16, nearly all leases will have to be reported on company balance sheets. Retailers, who often hold large numbers of leased properties and other operational assets, will need to change their accounting to reflect this. But some of the key points made in the report will equally apply to other sectors that have considerable lease arrangements such as telecommunications, transportation and oil and gas.

The new standard will also have a fundamental impact on performance comparability as there will be significant differences between retailers using IFRS 16 and those who continue to report using UK GAAP.

To help retailers prepare for these changes, we have put together a list of key questions to consider:

• Do they have the relevant and sufficient resources in place to ensure full and proper implementation?

• Have boards and executive management identified the financial and commercial impacts of the forthcoming changes, and the options available, so that all decisions are fully informed?

• Has the impact on the interests of key stakeholders, such as banks, investors, landlords and contractual partners, been fully considered and have they been consulted?

• How will stakeholders deal with the lack of comparability that will result from IFRS 16 and any implications for company valuations where lease obligations are significantly different to those currently assumed?

The report draws attention to a number of other challenges and considerations which I encourage you to have a look at if your business is likely to be affected by these changes.

With so many other challenges facing retailers and others it is easy for this to fall down their priority list, but it is vital that companies that will be affected start preparing for this now as the changes will require a lot of work.