IFRS update: Global lease accounting overhaul will impact a $1.2 Tr industry

Our IFRS expert, Luc Nijs, reports about the latest IFRS updates involving leases:

New rules suggested by the IASB in August (although the proposal has been in the making for years) will have a significant impact on the treatment of leases on many corporate balance sheets and will bring a lot of assets and liabilities back on the balance sheet that for a long time have been kept off balance sheet.

Despite fierce opposition from industry who fear more volatile corporate accounts and vastly more liabilities the rules  include that the liabilities of many companies would increase as they are forced to move rented assets such as aircraft, ships, shops and even photocopiers on to their balance sheets.

Current rules allow some leases to be classed as operating leases, in which the underlying asset and liability stay off the balance sheet. Others are logged as finance – or capital – leases, which do show up on the balance sheet.

Under the new proposal, the IASB and FASB said they were committed to abolishing the dual system as operating leases understated leverage.

Instead, they favour a unified approach in which lessees recorded an asset on their balance sheets based on their right to use the leased item. A liability reflecting future rental payments would also be posted.

On average, the changes will increase a company’s reported debt load by 58 per cent, according to PwC. Senior Partners at Deloitte indicated already that financial ratio’ will deteriorate and some companies will breach cloan ovenants under the new rules in a time where many companies are already at the edge of their covenant compliance.

In this IFRS course, the proposal will diligently be analyzed and assessed on its impact for business in different industries.

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