The impact of International Accounting Standards Board (IASB)/International Financial Reporting Standard 16 (IFRS 16)

The impact of International Accounting Standards Board (IASB)/International Financial Reporting Standard 16 (IFRS 16)

Article Type: Editorial From: Property Management, Volume 34, Issue 3.

It has been a decade since the IASB began their discussion on the reporting of leases in financial reports. With years of exposure drafts and public comment the predecessor, International Accounting Standard 17, is to be superseded by the new IFRS 16. These changes are likely to have a significant impact on the property sector and it has been suggested may result in many organisations moving toward owner occupation over leasing, as the financial accounting advantages of leases will no longer apply.

The new reporting standards in IFRS 16 come into effect for accounting periods from 1 January 2019 and require lessees to account for leases on the company balance sheet recognising the lease’s right to use property as an asset, and rental payments as a liability. This is a substantial change for many organisations and means that no longer can leases be regarded as operating leases and expensed over the lease term, while finance leases, where the lessee has the benefit of ownership and bears the risk of ownership are reported as an asset and liability on the company balance sheet. The new standard removes this distinction and in future nearly all leases will be reported as an asset and liability on the balance sheet. The lease liability will be measured initially as the present value of the future rent payments and will also take into account any prepayment of rent or lease incentives.

The impact of these changes for property managers is not clear; certainly the changes seem likely to impact retail lessees the most as the use of operating leases is far more prevalent in the retail sector. Bringing leases onto the balance sheet will impact key financial ratios derived from the company balance sheet and could affect debt to equity ratios and any covenants to maintain certain ratio levels linked to the balance sheet. Whether, over time, this will have a role on effect to the behaviour of organisations when making the lease/buy decision remains to be seen, but certainly property managers will need to take these aspects into consideration when establishing long term property strategies for their organisation. It may be some time before we see changes in market performance which might result in the publication of research relating to the impact of IFRS 16 but it will be interesting to follow these developments.

In this issue of Property Management we have the usual line up of high-quality property research from around the world. This issue has papers from Australia, the Netherlands and the UK. There is also the usual mix of residential and commercial management papers presented, representing the diverse interests of property managers.

The first paper in this issue comes from Joanna Poon from the University of Salford in the UK. Her paper is entitled “An investigation of characteristics affecting employment outcomes and patterns of real estate graduates” and, as the title suggests, is a detailed evaluation of student skills sought by employers. The research draws on data published in Australia as part of the Australian Graduate Survey conducted among all graduating students. The paper finds, not surprisingly, that English proficiency is a significant factor in gaining employments in both the real estate and construction sectors.

The second paper comes from Paul Cozens of Curtin University and Marc Tarca. This paper has a town planning focus but is still highly relevant to property managers with portfolios of residential property. The paper is: “Exploring housing maintenance and vacancy in Western Australia: perceptions of crime and crime prevention through environmental design (CPTED)”.

The paper explores the public and property professionals’ perceptions of property and the impact of CEPTED features. Using photographic images of well-maintained and identical poorly maintained property the paper monitors respondent perceptions of crime related issues. The findings have implications for property managers in terms of perceptions of crime and the link to poorly maintained property.

Paper three is written by a team of researchers at Delft University in the Netherland led by Job Taiwo Gbadegesin. Their paper is: “Investigating defiant attitudes in keeping lease agreement obligations in private rental housing market in Nigeria”. In this paper the researchers use a quantitative approach to collect data from real estate surveyors and valuers involved in residential management in Nigeria. The paper finds that lease covenants relating to prompt payment and prohibition of sub-letting are the two most commonly breached lease covenants. The paper attributes these breaches largely to economic factors, but also reports on the relative weighting of these factors between occupiers and managers. The findings will have implications for all property managers involved in residential leasing, particularly in regions with similar legal frameworks to those in Nigeria.

The fourth paper is written by Andrea Sharam et al. from Swinburne University of Technology, Australia. The paper “The barriers to re-purposing not-for-profit real property assets” reports on research to identify what barriers exist in Australia with respect to not-for-profit organisations that hold surplus land entering, into partnerships to develop affordable housing. The paper adopts a qualitative approach undertaking interviews with five organisations and identifies a range of issues from general inertia to opposition from constituents within the organisations. This paper provides a fascinating insight into the operation of not-for-profit organisations in Australia and their attitudes to property holdings.

The final paper is also based on research undertaken in Australia. This paper is written by Erika Altmann from the School of Health Science at the University of Tasmania. Her paper “Small scale housing unit developments: implications for Strata manager market penetration” investigates the management of multi-unit residential property in Australia where there is no external manager appointed. The paper uses a series of semi-structured interviews to gain insight into the issues faced by occupiers and highlights the difficulties faced in securing sound financial and contract management of smaller residential complexes. This paper also provides a very comprehensive literature review on the issues faced by strata title holders.

I trust that you find the range of research papers presented in this issue of Property Management interesting and informative. This on-going flow of quality research papers to Property Management continues to be strong however, quality papers are always in demand and I encourage you to present your research for inclusion in the journal.

Clive M.J. Warren

Further reading

IFRS (2016), “IFRS 16 leases project summary and feedback statement”, IFRS, London.

Cushman & Wakefield (2016), Lease Accounting Changes: CRE to Take Centre Stage, Cushman & Wakefield, London.