International Financial Reporting Standards (IFRS 16) in the Telecommunications Industry

Overview

The International Accounting Standards Board (IASB or the Board) issued a guidance in 2016 on accounting for leases IFRS 16. IFRS 16 replaces the earlier standard IAS 17 on lease accounting. The new standard impacts industries with assets under leases as part of their long-term business models, such as telecommunications, aviation, and construction industries.

The new standard requires leases to be accounted in the balance sheet on a 'right-to-use model. It further categorizes leases as short-term and long-term leases, unlike IAS 17, categorized into operating and Finance leases.

There is no significant change in lessor accounting in the new standard from IAS 17. Lessors will continue to classify all leases using the same classification principle between operating and finance leases.IFRS 16 is effective for annual periods beginning on or after 1 January 2019, with early application permitted.

Impact on Telecommunications Industry

The telecommunications industry is a capital-intensive industry, involving large CAPEX spends as part of its business. The telecom industry is dependent heavily on lease contracts to run its business. Lease transactions in the telecom industry relate to leases on store rentals, cell sites, among others. In the past, accounting for rental expenses had a significant impact on the income statement of telecommunications entities, impacting their EBITDA numbers.

The new standard states most leases need to be recorded on the balance sheet and lease expenses (interest and depreciation) to be recorded below EBIDTA (similar to Finance Lease in IAS 17) for lessees. This will help entities improve EBIDTA and strengthen their balances by an increase in net worth.

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