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Diluted Earnings Per Share Diluted EPS is a performance metric used to gauge the quality of a company's earnings per share (EPS) if all convertible securities were exercised. Convertible securities are all outstanding convertible preferred shares, convertible debentures, stock options (primarily employee-based) and warrants. Unless the company has no additional potential shares outstanding, which is a relatively rare circumstance, the diluted EPS will always be lower than the simple EPS.

Breaking it Down: Diluted EPS takes into account what would happen if dilutive securities were exercised. Dilutive securities are securities that are not common stock but can... Read More

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How to Implement IFRS 16 Leases

• Posted in:Leases
• Posted by:Silvia M.

24

The new lease standard IFRS 16 is exactly one of these earthshaking things that can make your head spin around.
Well, especially if your company uses the operating lease as an effective tool of getting your assets quickly with relatively low risk.
I wrote a few articles in the past for you:

• Summary of IFRS 16 Leases – contains the nice video
• Troubles with IFRS 16 Leases – I discussed the main difficulties when applying this standard
• IFRS 16 vs. IAS 17: How the lease accounting changed – you can find an easy numerical illustration of the whole trouble there.

Plus, I added the full course about the IFRS 16 Leases and its application into the IFRS Kit, so if you are dealing with that right now, I highly recommend checking out!
However, I keep getting the questions about how to implement IFRS 16.
What to do first and what to do next.
And, additional questions like: “Do I really need to go study my old 4 000 contracts and reassess them under the new rules? Oh holy s..t!!!”
As usual, I’d love to help a bit and give a helping hand.
In this article, you will learn:

• 3D strategy to implement IFRS 16
• What accounting policies do you have and what accounting policies are the best for you to select
• Do you really need to reassess everything???

3D strategy to implement IFRS 16

No worries, I’m not going to show you any special visual 3D effects here – I leave that to Mr. Spielberg or other Hollywood masters.
Each D stands for some step to take in order to adopt IFRS 16 and stay healthy, sane and cool at the same time.
Maybe you have already started with this process, but if not, let me quickly sum up:

D1: Diagnose

In the first stage, you should focus on assessing your own business and impact of IFRS 16 on it.
What should you be diagnosing?
Here’s the short list:

• Is your company heavily exposed to the changes in lease accounting or not? How big is the impact?
• Do you have the sufficient database of your leases containing all the information necessary for the new disclosures?
• Will the change require any technology or system updates?
• Will the change trigger the change in the business development or purchasing? Contracting?

D2: Decide

After you analyze and diagnose, you should focus on the important decisions.
I would say that two of them are especially important:

1. When are you going to implement IFRS 16? You have to apply IFRS 16 mandatorily for all periods starting on or after 1 January 2019.
   However, there’s another big change – the new revenue standard IFRS 15 Revenue from Contracts with Customers that needs to be adopted earlier, from 1 January 2018.
   For me, it’s always better to do all the changes at once, in order to make just one system or technology upgrade, just one restatement in the financial statements and just one big work.
   Therefore, would you rather implement IFRS 16 one year earlier, from 1 January 2018?
2. Which accounting policies are you going to select? There are more transitional options in IFRS 16. You can select more accounting policies to adopt IFRS 16.
   Which one is the best for your business? I write more below, just keep on reading.

Special For You! Have you already checked out the IFRS Kit? It’s a full IFRS learning package with more than 30 hours of private video tutorials, more than 100 IFRS case studies solved in Excel, more than 120 pages of handouts and many bonuses included. If you take action today and subscribe to the IFRS Kit, you’ll get it at discount! Click here to check it out!

D3: Do

At this stage, you need to work hard, spend a lot of money and simply go ahead.
If you did your homework in the first 2 stages well, then you have an easier job.
So, upgrade your software, amend your contracts and train your people to work under the new system.
Don’t forget to involve people from across your company, not only accountants, because omitting the purchasers, lawyers or other relevant areas could result in inefficiencies and you paying a price.
OK, that was a very rough outline of what you should do and if you haven’t started yet by now, I would say it’s time.

Do we have to reassess all existing lease contracts?

The standard IFRS 16 introduced the new lease definition and as a result, some contracts might contain the lease under IFRS 16, but not under IAS 17 or IFRIC 4.
What does it practically mean?
Well, if you want to apply the new lease standard to all contracts, then you should go through all of them and seek whether they contain the lease as defined under IFRS 16.
A lot of work!
Luckily, IFRS 16 brings so-called practical expedient. It is a relief that permits:

• To apply IFRS 16 to the same contracts as to which IAS 17 and IFRIC 4 were applied, and
• Not to apply IFRS 16 to the contracts to which IAS 17 or IFRIC 4 were not applied.

Simply speaking, you don’t have to reassess the contracts and seek whether they contain the lease.
You can just take all lease contracts that you currently treat as the lease contracts under IAS 17 Leases and apply the new rules to them.
But, of course, you have to assess the new contracts entered into after the date of initial application. The exception applies only to the older contracts.
In my opinion, most companies will apply this expedient and simply account for the change on “old lease contracts” without seeking the lease in other contracts.
However, I can imagine the situation in which you had an operating lease contract, but not a lease under IFRS 16.
In this case, I would probably forget about expedient and reassess the lease, because I would definitely prefer keep that contract off balance sheet rather than accounting for the right-of-use asset.
Also, you should keep in mind that you can’t apply the expedient only to some selected contracts. Either you apply it fully to all contracts, or not at all.

Do we have to bring all the operating leases to the balance sheet?

No.
If you the lease term is maximum 12 months, or the leased asset has the low value (like furniture or computer), then you can account for an operating lease payments straight in profit or loss.

How to account for IFRS 16 adoption?

In other words – how to make transition in your financial statements?
The standard IFRS 16 offers 2 methods of a transition:

1. The full retrospective approach Under the full approach, you need to apply IFRS 16 retrospectively in line with IAS 8.
   It means that you need to restate all prior financial information and recognize an adjustment in equity as of the beginning of the earliest period presented.
   Therefore, if you adopt IFRS 16 for the period beginning on 1 January 2019, you need to book the adjustment in equity on 1 January 2018.
   Also, all your comparative information for the year 2018 will be presented under IFRS 16.
   This method is more demanding, because in fact, you need to present the data for the year 2018 under both new and old rules:
   
   • In the financial statements for the year ended 31 December 2018, you present your leases under IAS 17;
   • In the financial statements for the year ended 31 December 2019, you present your leases under IFRS 16, including the comparative information – year 2018.
   Lots of work!
   
   Special For You! Have you already checked out the IFRS Kit? It’s a full IFRS learning package with more than 30 hours of private video tutorials, more than 100 IFRS case studies solved in Excel, more than 120 pages of handouts and many bonuses included. If you take action today and subscribe to the IFRS Kit, you’ll get it at discount! Click here to check it out!
   
   I guess that exactly because of the terrible amount of work connected with this approach, many companies will select the second one – modified retrospective approach.
   However, the full retrospective approach has its big advantage – although there’s a lot of work, you are presenting the fully comparative data, because both the years 2019 and 2018 are prepared under the same rules (in the financial statements for the year 2019).
2. The modified retrospective approach Here, you need to apply IFRS 16 from the beginning of the current reporting period.
   It means that you do NOT need to restate the financial information for the prior comparative year.
   You simply leave the prior year under older rules of IAS 17.
   The adjustment to bring your leases under the new rules of IFRS 16 is recognized in equity as of the beginning of the current reporting period (not the earliest presented as under the full approach).
   Also, you don’t need to present some disclosures as under the full approach.
   Overall, this is a very cost effective, although not very comparable methodology and I bet it will be the most popular among all companies restating their leases.

The comparison of both approaches is here:


 

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Beware the Overfit Trap in Data Analysis

It can be exciting when your data analysis suggests a surprising or counterintuitive prediction. But the result might be due to overfitting, which occurs when a statistical model describes random noise rather than the underlying relationship you need to capture. You can guard against this trap by keeping your analysis simple. Be on guard against spurious correlations, and look for relationships that measure important effects related to clear, logical hypotheses. Test for overfitting by randomly dividing the data into a training set, with which you’ll estimate the model, and a validation set, with which you’ll test the accuracy of the model’s predictions. An overfit model might be great at making predictions within the training set but raise warning flags by performing poorly in the validation set. You might also consider alternative narratives: Is there another story you could tell with the same data? If so, you cannot be confident that the relationship you have uncovered is the right — or only — one.

Adapted from the HBR Guide to Data Analytics Basics for Managers

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Gross Margin Gross margin is a company's total sales revenue minus its cost of goods sold (COGS), divided by total sales revenue, expressed as a percentage. The gross margin represents the percent of total sales revenue that the company retains after incurring the direct costs associated with producing the goods and services it sells. The higher the percentage, the more the company retains on each dollar of sales, to service its other costs and debt obligations.

Breaking it Down: The gross margin number represents the portion of each dollar of revenue that the company retains as gross profit. For example, if a company's gross margin... Read More

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