In this second of two blogs, we look at the impact of the leasing changes to FRS 102 coming soon. Last week we looked at the main balance sheet impact. This week we look at the P&L impact.
The familiar rent expense in the P&L will largely disappear and will be replaced by:
- Depreciation of the ROU asset, along with an
- Interest expense for the lease liability.
The impact of these changes will often result in a higher EBITDA (Earnings Before Interest, Tax, Depreciation, and Amortisation) as lease costs move from operating expenses to depreciation and finance costs.
The other impacts will be:
- Businesses, not for profit entities and charities with loan agreements tied to financial covenants (e.g., debt-to-EBITDA ratios, interest cover) will need to carefully assess the potential impact of these changes. The sooner they start having conversations with lenders the better.
- An increase in reported assets could push some businesses over the audit exemption size thresholds, potentially triggering the requirement for a statutory audit.
Work to be done:
The preparatory work to be done in advance of 1 January 2026 will include:
- Identifying all affected lease contracts
- Identifying leases ‘hidden’ within service agreements
- Obtaining detailed information from lease agreements so as to have an accurate calculation of the ROU asset and lease liability along with the payment schedules, extension options, and an appropriate discount rate.
This change in Irish GAAP lease accounting is a significant one, promising more transparency but also requiring advance preparation. The sooner the changes are understood, the sooner businesses and charities/not for profit entities can plan to ensure effective compliance by the application date.
For audit cold file reviews and tailored training sessions explaining more about various topics like AML, Audit, FRS 102, please send a mail to john@jmcc.ie.
For more on engagement and representation letter templates and a variety of CPD webinars on money laundering and other accounting/audit related topics, please go to our website for:
- Our latest CPD Webinar on The Main Changes in Irish GAAP (recorded July 2024)
- Anti-Money Laundering Policies Controls and Procedures Manual (March 2022) — View the table of contents
- AML Webinar (December 2023) available here, which accompanies the AML Manual. It explains the latest legal AML reporting position for accountancy firms and includes a quiz. Upon completion you receive a CPD certificate for attendance in your inbox.
- Letters of engagement and similar templates—Please visit our website here where immediate downloads are available in Word format. A bulk discount is available for orders of five or more items bought together.
ISQM TOOLKIT, or if you prefer to chat through the different audit risks and potential appropriate responses presented by this new standard. We typically tailor ISQM training and brainstorming sessions to suit your firm’s unique requirements. Please contact John McCarthy FCA by email at john@jmcc.ie.
