# Come Together: Finance and Real Estate Collaborate to Tackle IFRS 16
Author:  Pal Sinha, Barnali 
Author URL: https://financedigest.com/author/pal-sinha-barnali
Published: 2017-08-09
Category: FINANCE
Category URL: https://financedigest.com/category/finance
Meta Title: IFRS 16 Update: Impact of Leasing Changes on Finance
Meta Description: Discover how the transition to IFRS 16 will impact the balance sheets of UK companies and the collaborative efforts needed between finance and real estate
URL: https://financedigest.com/come-together-finance-and-real-estate-collaborate-to-tackle-ifrs-16html

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**Steven Fox,** Corporate Real Estate Solutions, Qube Global Software

![Steven Fox](https://prod.superblogcdn.com/site_cuid_cm5qst7v3003gwirgwqtxn8i8/images/steve-fox-1736843604269-compressed.jpg)

Steven Fox

Leasing is a widely used source of financing in the UK. It allows businesses of all [sizes access](https://www.financedigest.com/surgical-hand-access-port-market-executive-summary-introduction-sizing-analysis-and-forecast-to-2028.html "Surgical Hand-Access Port Market Executive Summary, Introduction, Sizing, Analysis And Forecast To 2028") to property, plant, machinery and equipment without the need for large initial investment.

Traditionally however, the majority of leases have not been reported on [balance sheet](https://www.financedigest.com/ecb-policymakers-back-jumbo-rate-hike-differ-on-balance-sheet-cut.html "ECB policymakers back jumbo rate hike, differ on balance sheet cut"). The reason for this is that up until now, many leases have been categorised as ‘operating leases’ which are only included as rent expense in income statements.

This has historically presented a [challenge for investors](https://www.financedigest.com/investors-reorient-portfolios-amid-macroeconomic-challenges.html "Investors reorient portfolios amid macroeconomic challenges") looking to compare companies. Some investors have even gone so far as to suggest that reporting leases in this way is misleading as it can create an unrealistic picture of leverage and leased assets used, leading to an overestimation of liabilities.

In light of these criticisms, the [current standard on accounting](https://www.financedigest.com/coffee-current-accounts-and-the-commoditisation-conundrum.html "Coffee, current accounts and the commoditisation conundrum") for property leases, IAS 17, will no longer apply within any country that operates under International Financial Reporting Standards (IFRS) from the 1st January 2019. The IFRS 16 update will establish the principles for recognition, measurement, presentation and disclosure of leases.

For the first time, almost all lease obligations will have to be accounted for. This will lead to the ‘reappearance’ of trillions of pounds worth of [assets appearing on the balance sheets](https://www.financedigest.com/decoding-balance-sheets-analyzing-assets-liabilities-and-equity.html "Decoding Balance Sheets: Analyzing Assets, Liabilities, and Equity") of IFRS compliant companies. At the instance of [transition significant increases will appear in the value](https://www.financedigest.com/in-line-transit-time-ultrasonic-flow-meters-sales-are-set-to-be-valued-at-us-337-5-mn-in-2021.html "In-Line Transit Time Ultrasonic Flow Meters sales are set to be valued at US$ 337.5 Mn in 2021") of an organisation’s gearing and liabilities, impacting deferred tax, disclosures, bonus targets (if calculated on EBITDA) and more.

Given this, there is a clear and present need for finance professionals to get to grips with this change ahead of the 2019 deadline. However, while accounting standards have traditionally been the reserve of the finance department, leases – specifically those concerning equipment, estates, and facilities are the remit of [real estate](https://www.financedigest.com/asia-shares-lifted-by-fed-pause-bets-china-real-estate-retreats.html "Asia shares lifted by Fed pause bets; China real estate retreats") and facilities management.

It’s evident then that [finance and real estate leaders must](https://www.financedigest.com/top-8-must-know-personal-finance-facts-for-2023.html "Top 8 Must-Know Personal Finance Facts for 2023") collaborate to ensure true compliance.

**Working in partnership**

In many cases, the division of labour between real estate, FM and finance functions is likely to be quite evenly split. For real estate directors, the [challenges will include identifying all property leases within the business](https://www.financedigest.com/overcoming-challenges-faced-in-business-from-one-woman-to-another.html "Overcoming challenges faced in business: from one woman to another") – a complex task for larger companies. They will also need to check that their [systems are capable of capturing the right information](https://www.financedigest.com/the-cardiovascular-information-systems-market-is-expected-to-grow-on-a-persistent-note-in-the-future.html "The Cardiovascular Information Systems Market is expected to grow on a persistent note in the future") and monitoring this on an ongoing basis. If not, a reconsideration of the [business lease strategy](https://www.financedigest.com/fx-hedging-strategies-to-protect-your-business.html "FX hedging strategies to protect your business") will be required.

**Real estate’s role**

Real estate is going to have to [become more strategic in the way it approaches](https://www.financedigest.com/intuitive-decision-making-could-this-approach-be-the-most-underrated-way-to-becoming-a-successful-leader.html "Intuitive decision making: could this approach be the most underrated way to becoming a successful leader?") new leases: the impact of every lease covered by IFRS 16 will need to be considered in this context.

It may even find that its preferred approach to property leases is no longer in the best interests of the business. [Procurement and finance](https://www.financedigest.com/trouble-in-paradise-the-great-procurement-and-finance-disconnect.html "Trouble in paradise: the great procurement and finance disconnect") teams, for example, will need to be involved in discussions over whether new assets need to be leased or bought.

Taking inventory of all existing lease agreements and collating the necessary data, including lease terms, renewal options and payment terms is a critical first step, prioritising the analysis of more complex or significant leases.

[Property management](https://www.financedigest.com/how-to-get-started-in-the-world-of-property-management.html "How to Get Started in the World of Property Management") technology tools can provide this data and inform both the best way to account for existing leases under the new standards and the right leasing strategy going forward.

Armed with this data and a practical knowledge and experience, [real estate directors can add significant strategic value when working](https://www.financedigest.com/real-estate-brokers-vs-agents-which-one-should-you-work-with.html "Real Estate Brokers vs. Agents: Which One Should You Work With?") alongside finance. That may represent a new way of operating at many companies – traditionally real estate decisions would have been made without any involvement from finance departments – so it is [important that both teams work collaboratively](https://www.financedigest.com/the-importance-of-a-proactive-and-collaborative-approach-to-reducing-contactless-fraud.html "THE IMPORTANCE OF A PROACTIVE AND COLLABORATIVE APPROACH TO REDUCING CONTACTLESS FRAUD") on the business’s response to the reforms as equal partners.

**Finance’s role**

For finance teams, key tasks will include having an in-depth understanding of the legislation in [order to be able to identify exemptions](https://www.financedigest.com/south-korea-to-appeal-court-order-exempting-private-schools-from-vaccine-passes.html "South Korea to appeal court order exempting private schools from vaccine passes") and transitional reliefs. For example, how it impacts on capital, provisioning, and even [tax payments through the timing of profit](https://www.financedigest.com/spain-readies-new-tax-on-electric-utilities-profits.html "Spain readies new tax on electric utilities’ profits") recognition.

It will also entail carefully modelling the impact on financial results and [statements](https://www.financedigest.com/uk-finance-minister-hunt-to-make-statement-at-1000-gmt-source.html "UK finance minister Hunt to make statement at 1000 GMT – source"). This will include determining whether any changes need to be made to loan agreements, debt covenants, bonus, profit-sharing or compensation agreements. Pro-forma financial information will also need to be [prepared](https://www.financedigest.com/six-ways-to-prepare-for-a-personal-finance-crisis.html "Six ways to prepare for a personal finance crisis") and information gaps created by subsidiaries and foreign affiliates identified. What’s more, these changes and their consequences need to be clearly communicated to all stakeholders.

A critical measure of [success for finance teams in the run up to 2019 will be how closely they work](https://www.financedigest.com/how-to-make-hybrid-working-successful.html "How to make hybrid working successful") with real estate, FM and procurement. These groups must learn to integrate and collaborate if they wish to be fully compliant with these new standards. Only by working closely together can leaders [see the true benefit of these changes](https://www.financedigest.com/the-antibodies-contract-manufacturing-market-to-see-through-the-probable-sea-change-through-digitization.html "The Antibodies Contract Manufacturing Market to see through the probable sea change through digitization"), with a truer balance sheet that more accurately reflects the business’s liabilities, ultimately attracting more inward investment.


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