Leases: Finance vs. Operating. What’s Changing 1st January 2019? IFRS 16

The current standard IAS 17 differentiates leases between finance and operating dependent on certain characteristics.

The new standard IFRS 16 will come into effect for periods commencing after  1st January 2019. Leases will no longer be distinguished between finance and operating. Read on to understand the changes, or fill out our quick contact form if you have questions about how this will affect you that you would rather chat about over the phone.

Finance Lease

A finance lease in substance means all of the risks and rewards of the assets have been transferred to the lessee.

Indicators of a finance lease are:

  • The lease transfers ownership to the lessee by the end of the lease term
  • The lessee has the option to purchase the asset at a price expected to be sufficiently lower than its fair value (i.e. market price)
  • The lease term is for the major part of the asset’s useful economic life
  • At inception, the present value of minimum lease payments is substantially all of the fair value of the asset
  • The asset is of a specialist nature such that only the lessee can use it without major modification

The non-current asset is then recognised at the lower of fair value and present value of minimum lease payments.

The asset is depreciated over the shorter of the lease term or its useful economic life.

Lastly, the liability is recognised at amortised cost.

Operating Lease

The definition of an operating lease is that it is not a finance lease i.e. the terms of the lease contain none of the indicators outlined above.

Lease payments are recognised in the profit and loss over a straight line basis and any incentives are spread over the life of the lease.

The only disclosure of operating leases is a note to the accounts showing the split of outstanding payments between less than 1 year, 2 to 5 years and more than 5 years.

Land and Building Leases

Land and building leases must be split into their separate component parts and treated accordingly.

Land is usually treated as an operating lease due to its indefinite useful economic life whereas the treatment of the building element is dependent on the lease terms.

IFRS 16. What’s changing?

The new standard IFRS 16 will come into effect for periods commencing after  1st January 2019. Leases will no longer be distinguished between finance and operating.

On commencement of the lease, the lessee recognises two things; a right of use asset and a lease liability.

The right of use asset is calculated as:

  • Initial liability
  • Plus payments made before commencement
  • Plus direct costs
  • Plus dismantling costs
  • Less incentives received

The lease liability is measured as an obligation, very similar to IAS 17. The initial measurement is the present value of future cash flows discounted at the rate implicit in the lease.

However, if the lease is for less than 12 months or if it is of low value, a company can choose to record payments on a straight line basis to the profit and loss over the lease term.

Egan Roberts Chartered Accountants and Financial Advisers Ribchester, Lancashire.

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Every business owner needs a team of professionals in the background who provide continuous support and advice. That’s what we do at Egan Roberts.

Through years of commitment to our business clients we have developed a wide range of skills and services designed to improve business performance and profitability.

We are committed to providing a first class service tailored to the individual needs of each client.

We keep a close eye on all the essentials and offer proactive advice on how to improve personal, family, or business finances.

Life Insurance for Dads

We’ve just celebrated Father’s Day and yet we’re concerned the majority of fathers in the UK are not protecting themselves financially, according to research by Scottish Widows. It has been reported 58% of fathers have no life insurance.

What does this mean?

Fathers are putting their dependents at risk in the event they lose their main source of income.

This is an increase of 5 percentage points since the same survey was conducted in 2017, meaning more households could face financial instability.

Even fewer men (18%) with dependent children had taken out a critical illness policy, but 20% said their household wouldn’t survive financially if they lost their main source of income.

When asked how they would manage in this scenario, 45% said they would have to eat into their savings.

For 17%, these savings would not last any longer than 3 months, while 12% don’t have any savings at all.

“Many fathers don’t consider having insurance as a necessity. The value of protection is to provide long-term peace of mind about having financial security in place for your dependents. Recent changes to bereavement benefits mean it’s more important than ever for fathers to review their financial protection needs and seek advice to make sure their household is covered.” Gary Burchett, protection director at Scottish Widows

The aim of life insurance

Cover is to provide money for people who financially depend on you.

If there is no one who will be financially distressed by your death, life insurance is probably not essential, though there are other reasons why it would be useful.

One simple question:

“if you were in a fatal traffic accident tomorrow, would anyone else be left in the financial mire?”

If the answer is “yes”, then we should discuss your insurance needs, in order to ensure that you and your dependents needs are properly catered for.

We are committed to providing a first class service tailored to the individual needs of each client.  To discuss this further, please contact us.

You became a doctor to be a doctor, not to run a business.

Whether you’ve had your practice for some time or you are just starting out, helping patients and taking on all the admin that comes with running a business by yourself is a big task; it might even feel impossible at times!

 

One of our specialisms here at Egan Roberts is acting for businesses in the medical profession so you have more time to focus on what you wanted to do in the first place. However, we do need a little bit of help from you!

Separate your finances

It’s really important that you keep your practice and personal finances separate by having a business bank account.
With Making Tax Digital coming into force soon, you should also consider investing in compliant software now. Read more on those here. We are all Xero Certified Advisors at Egan Roberts but have experience in various different software.

Use your software

Don’t just input invoices and receipts blindly. Use the reports available to have a good idea of how your business is performing; ideally on a monthly basis. We can guide you on the best reports to use and what they mean. If you outsource your bookkeeping, you should still be aware of this.

Why do you need our help?
  1. We keep up to date with the ever-changing tax laws to ensure you pay the correct amount. You’ll no longer need to worry whether you’ve filled out your tax return correctly!
  2. We are able to look at the big picture of your business and advise you where you can improve or make savings.
  3. We can advise you on future plans – whether that be business growth or retirement strategies!

 

Want to know more about how we can help you and your business? Call us on 01254 583515 or email steven@egan.co.uk to arrange a free, no obligation meeting with us.

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We are looking forward to your speaking with you and helping you with your accountancy and financial needs.