Hong Kong: IFRS 16 Implementation In Hong Kong Has A Major Impact To Company's Financials, Operations, Key Metrics And Treasury Strategy

Last Updated: 25 April 2019
Article by Lawrence Tsi

The new international accounting standards on treatment of leases will have a serious impact on the financials and operations of many companies in Hong Kong.

This article first appeared in Hong Kong Business.

The International Accounting Standards Board (IASB) announced International Financial Reporting Standard (IFRS) 16 in January 2016, becoming effective 1 January 2019, replacing IAS 17.  It provides much greater transparency on companies' lease assets and liabilities, shining a light on arrangements that were previously accounted for as off balance sheet financing, but with a risk that it could harm stakeholder perceptions of company performance.   

What is IFRS 16?

IFRS 16 defines what a lease is and, subject to certain recognition exemptions, companies now have to bring operating leases onto the balance sheet (only finance leases were included previously) and can no longer leave them as off balance sheet items. The distinction between operating and finance leases under IAS 17 is eliminated. This provides transparency of all major leases a company holds but has a potentially significant impact to its financials and operations.

Note that IFRS 16 does not fully converge with the equivalent standard under US GAAP (ASC 842), so companies doing business in both Hong Kong and the US ("dual reporters") must continue to apply different lease accounting models.

Major impact is on lessees

Due to the changes, some commonly used financial ratios will be impacted. In Hong Kong, we have already seen first-hand the impact that such changes have had on companies that are either required to file periodic financial returns to the Securities and Futures Commission ("SFC") or submit periodic accounts to stakeholders during the first quarter of 2019, with companies reporting a major shift in their key ratios.

There is also a significant impact to the lessees' profit & loss (P&L), and Earnings Per Share (EPS). These will fall during the early years of a lease. Meanwhile, Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) will increase as rental expense, which was previously classified "above the line" as operating costs under the old standard, are now excluded from the EBITDA measure as depreciation and interest expenses.

Companies with internal KPIs or external treasury metrics such as loan covenants, and staff bonus plans built around these P&L measures, will be impacted.

Finally, IFRS 16 will have a significant impact on the company's cash flow classifications and the demands of its disclosure requirements in financial statements.

What is the impact on key industry sectors in Hong Kong?

This will have a serious impact in Hong Kong on businesses that use lease arrangements as a means to access assets, particularly those heavily involved in the retail, shipping, property and aviation sectors. There is also a potential risk of these changes affecting the banking sector.

Major sectors of the Hong Kong economy affected are:

  • Retailers, wholesalers and service industries (healthcare, professional services etc.) that rely heavily on the use of leased real estate (such as offices or shops) as part of their business models, will be severely impacted. They need to re-assess whether to continue to lease properties or buy them; and renegotiate terms of leases with their lessors, as they can no longer hold such investments off the balance sheet, eliminating a key benefit of the leasing model.
  • Companies leasing ships may need to recognise their interest in these vessels as a Right of Use asset with a lease liability to be recorded for future charter payments.
  • Aviation companies will see a major shift in the size of their asset book, given the sector is heavily dependent on leasing structures. Forward payments on these leases must also be included, vastly increasing the indebtedness shown on the balance sheet.
  • The impact on the financial sector is less easily measured or foreseeable, particularly from a customer experience perspective. It was previously possible for banks to structure financing deals for their customers off balance sheet using lease and/or certain sale-and-leaseback structures. This is essentially eliminated under IFRS 16 and may result in companies seeking alternative solutions. Customers should seek clarification from financial institutions regarding the impact on covenants and credit ratings.

Lessors must also remain alert as lessees will likely wish to renegotiate lease terms and structure future leases differently.

How does this affect investors?

With all leases being reflected on the balance sheet, there will be a consequential shift in both assets and liabilities during the 2019 reporting period.

Companies must carefully explain the sudden change in their financial position and key financial measures to investors due to the introduction of IFRS 16 to avoid damaging investor confidence and to manage investors' expectations.

Transition from IAS 17 to IFRS 16

Lessees may apply two different transition methods:

  • apply the IFRS 16 standard to each prior accounting period retrospectively
  • apply the rules at the initial date of application of the new standard and not restate comparatives.

Both methods require a significant amount of work and companies need a detailed understanding of the resources, costs and stakeholders' needs in selecting the most appropriate transition method. Some may wish to disclose the transition approach in their 2018 financial statements.

What are TMF Group's professionals seeing in 2019?

Based on our interaction with market participants in Hong Kong, many companies are struggling with implementation or are just starting to understand how they will be affected.

Some common pitfalls and challenges seen thus far:

  • inadequate IT and manual systems to collect lease data and perform bookkeeping
  • lack of acknowledgment that the definition of a "lease" has changed
  • unclear on costs and tasks involved with each transition option
  • internal and external stakeholders not yet communicated with on the impact that IFRS 16 has on KPIs, remuneration, bank covenants, internal processes, lease strategy and tax reporting.

Now that 2019 is here, action is urgent. The standard is already effective and has real consequences on finance and operations – are you sure you are ready?

Talk to us

The details behind IFRS 16 are complex and must be carefully implemented and clearly explained in company financial reports throughout 2019. TMF Hong Kong can help you to comply with IFRS 16 and with future changes to the accounting standards of the IASB. To learn more about TMF Group and our services. Talk to us

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions