Service Agreement Ifrs 16

This may be a new point of contention between investors and accountants, as contracts that contain service contracts are not presented on the balance sheet, which offers the same potential for misrepresentations as those that currently exist, given that companies can structure agreements accordingly. This is one of the main reasons for the leasing accounting reform, given that the absence of operating leasing contracts on the balance sheets did not reflect the true economic reality, as companies could have assets worth thousands of assets that were simply not displayed as liabilities. While unlikely, it is possible that this new categorization will lead to similar economic inconsistencies between relationships and reality. Since the recognition of ifrs 16 leases has the effect of recording the bulk of all leases in a lessee`s balance sheet, the appreciation of the value of a contract is (or contains a lease) greater than under IAS 17 and IFRIC 4. In practice, the main impact will be on contracts that are not in the legal form of a lease agreement, but involve the use of a particular asset and may therefore contain a lease agreement, such as outsourcing, order manufacturing, transmission and electricity contracts. Currently, this assessment is based on IFRIC 4; HOWEVER, IFRS 16 replaces IFRIC 4 with new guidelines that differ in some important respects. To address this situation, the IASB has provided detailed guidance, examples and definitions to provide a clear idea of what a leasing component is and what is considered a service element. This highlights a shift in the categorization of leases, as the focus from « What type of lease is this contract? » shifts to « Is it a lease or not? » Boards of directors have provided guidelines and facilities to leasing companies, which means that they do not need to check active leases in progress to determine if they contain a rental or service element. From the effective date, companies need to have a clear idea of how their agreements are categorized and billed. In addition, the contractual conditions must be carefully examined in order to determine the duration of the contract (depending on possible exit or renewal clauses) or the existence of « service » components to be accounted for separately.

One observation of this new definition is that IFRS 16 does not contain a definition of « services », but that, as a Deloitte spokesperson pointed out, this should not create significant confusion: service contracts should not be activated on the balance sheet, but a lessee may choose not to separate the service elements from the lease and to treat the entire contract as a financial lease. Companies should only choose this option if the service components of contracts are small or if they cannot easily distinguish between values. The distinction is very important, as some contracts currently considered leases are now accounted for as service contracts under IFRS 16 and vice versa. Contracts that are considered leases are recognised, with depreciation on ROU assets and rental liabilities recognised separately. This requires companies to check all their property, plant and equipment contracts to determine if they contain a leasing element under the new accounting rules. If the supplier has the right or obligation to replace the asset for repair purposes or to provide routine maintenance services (e.g. B in order to allow him to install a technical upgrade that has become available), a customer is not prevented from having the right to use an identified asset. . . .