Advisers and small business owners will have to be quick to avoid the pitfalls of changes in accounting practices coming into effect in 2019.

Ralph Martin, audit technical director at Crowe Howarth, has warned about the new International Accounting Standards Board's International Financial Report Standard (IFRS) 16 Leases.

The new rules will abolish the concept of the operating lease, and could have a big influence on debt-to-equity or interest cover ratios.

“It's easy to think that 2019 is nearly three years away, but our advice to small businesses is to start preparing for the change now,” he said.

“Many loan agreements contain covenants based on ratios such as debt-to-equity or interest cover. The new standard could significantly affect those calculations.

“What was treated in the past as an operating lease will now sit in the balance sheet as a liability. The effect could be to trigger a breach of their loan covenants that could give the bank the right to demand repayment of the loan in full.

“Exceptions to this significant standard will be short-term leases (less than one year) and low-value assets such as office equipment and computers, but clearly won't exclude long-term property leases.”

Martin says the new standard may even require businesses to adjust their accounting systems so that they gather the required data.

Additionally, the reclassification of rent into a mixt of ‘depreciation' and ‘interest' could impact earn-out arrangements based on earnings before interest, taxes, depreciation and amortisation (EBITDA) multiples.

Finally, Martin says the replacement of the straight-line expenses approach to operating leases with front-loaded recognition of interest expense may have an influence on the timing of earnings associated with major projects and asset groups.