How IFRS 16 Will Impact Your Balance Sheet

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How IFRS 16 Will Impact Your Balance Sheet

There’s no shortage of ways to supercharge a company’s growth, from finessing the perfect funnel to using BI to make informed decisions, smart business leaders have tried them all. But a new accounting standard, which comes into effect on January 1, 2019, could lay the groundwork for a new growth strategy—one that puts space at its core.

Called IFRS 16, this new standard requires companies to disclose long-term leases on their balance sheet. While this requirement won’t have a direct impact on company profits, it will shed light on a company’s long-term financial strategy and obligations.  

Here’s what it means for your business:

What does IFRS 16 mean for companies with existing commercial real estate leases?

IFRS 16 requires a leaseholder to recognize assets and liabilities for all leases with a term of more than 12 months, unless the underlying asset is of low value (below $5,000). Currently, most companies do off-balance leases, because they want to tuck one of their biggest expenses under the rug by grouping the costs under operating expenses. This new regulation will change that.

How will my company be impacted by this change?

For companies that are already heavily leveraged, or are looking to keep a good cash position, this is going to be a major issue. At the startup stage, debt to equity ratio is an important metric when looking to attract funding, make an exit, borrow money, or invest back in the business, so these stage companies will be particularly vulnerable to the change.

How can this change work to our advantage?

Any financial executive looking at real estate wants to put their company in the best position possible from an asset to a liability perspective. Breather is an answer for companies facing these new requirements, providing more flexible options — and no requirement for a 12-month commitment — for companies growing and expanding.

Since the standard is only required if a lease is longer than 12 months, turning from a traditional real estate lease to a space-as-a-service solution is one key step companies can take to become not only financially agile but financially stable.

 


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