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Understanding and preparing for TFRS 16

Nov 29. 2018
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By Special to The Nation

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The new standard for leases developed by The Federation of Accounting Professions (FAP), TFRS 16, will take effect in Thailand at the 2020 new year.

The new standard will require lessees to bring most lease agreements on-balance sheet, recognising new assets and liabilities. (TFRS 16 will kick in one year after the effective date of the correlated International Financial Reporting Standard, IFRS 16.) 

Under the new standard, companies that lease major assets will see an increase in reported assets and liabilities, noted Sukit Vongthavaravat, advisory lead partner from KPMG in Thailand. A wide range of industries, including retailers, power and utilities and airline companies will be impacted.

 “The larger the lease portfolio, the greater the impact on key reporting metrics such as debt ratios,” said Sukit.

“In addition, the adoption of TFRS 16 may result in a significant amount of deferred tax assets or liabilities in financial statements. Consequently, the companies should address the potential impact of TFRS 16 adoption to its stakeholders in the early stages to avoid unexpected outcomes.”

He continued: “Finally, from a daily operations perspective, companies should consider using IT solutions for end-to-end processes, such as lease contract management, lease payment schedules, asset and liability calculations, automated journal entries and financial reporting. IT solutions help ensure compliance with TFRS 16 and can handle a large volume of lease contracts effectively.”

A wave of accounting changes is expected to be in effect from 2020 onwards in Thailand. The most significant changes will come with TFRS 16, which will alter standards for a wide variety of sectors.

Any entity size – whether small, medium or large enterprises – is expected to be affected because most companies hold some kind of “operating lease” under the current TAS 17 lease standard – including land, buildings, offices, vehicles, machinery, equipment, computers, phones, cars, photocopiers and plants. 

The impacts on companies could be diverse. For some entities, the financial impact will be the most relevant, due to the relatively high expenses of operating leases under TAS 17. In other countries, for example, where some entities have already assessed the impact of the initial adoption of IFRS 16, assets and liabilities were increased by an estimated 25 per cent.

For other entities, the administrative implications will be the most challenging change, once new processes and systems are implemented in order to measure and manage the high volume of lease agreements. In some large groups, we are aware of more than 10,000 lease contracts!

Additionally, entities will need to implement new accounting policies and procedures, due to the significant accounting practice changes and the judgement required under TFRS 16 for measuring the new right-of-use asset (ROU) and lease liability, as well as conducting an impairment review over those ROU assets. 

It may also be necessary to carry out a review of financial ratios, such as covenant conditions under loan contracts, an analysis of tax effects, and an analysis of the possible effects on the business model of the company. 

As a result, companies need to first understand their leasing portfolio and how it impacts their business. An evaluation of the systems, processes and internal controls is also extremely important.

Moreover, the time required to assess the impact and implement the new standard cannot be underestimated, since the efficient application of TFRS 16 requires the investigation of structural solutions that reduce impacts and eliminate gaps in the processes. 

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