This site uses cookies to provide you with a more responsive and personalised service. By using this site you agree to our use of cookies. Please read our cookie notice for more information on the cookies we use and how to delete or block them.
The full functionality of our site is not supported on your browser version, or you may have 'compatibility mode' selected. Please turn off compatibility mode, upgrade your browser to at least Internet Explorer 9, or try using another browser such as Google Chrome or Mozilla Firefox.

The Bruce Column — Bringing clarity to leases: The new standard

  • Paper clip (dk gray)  Image

13 Jan 2016

IFRS 16, the long-awaited standard on leasing, is published. Now the task of implementing it begins. Our resident, regular columnist, Robert Bruce, takes a look at what is involved.

Leasing has been a long haul of a flight. It was first on the agenda in the early days of the IASB and since then has been through many stages: a joint project with the US standard-setters, FASB, followed by a joint discussion paper, and two joint exposure drafts. And it has been hit, through all that time, by vociferous and determined opposition. But, after a few twists and turns, the IASB has come to an answer and we have a standard. IFRS 16 is finally open for business and comes into force for reporting periods beginning on or after 1 January 2019. And the IASB is happy. Chatting with its Chairman, Hans Hoogervorst, the other day he told me that by their reckoning 85% of leases are held off-balance sheet at present. And, once IFRS 16 comes into force, that figure will drop, as he put it, ‘to zero’.

In the short term there are going to have to be some tricky decisions to be made. There will be more judgment and a steep learning curve, though there are three years of lead-in. And there are peculiarities. For example, the way in which the standard-setters have extricated themselves from the potentially time-consuming and cost-consuming issue of what should be done about small-ticket items, like office furniture, has been described by Hoogervorst as ‘not conceptually very beautiful’. The USD 5,000 indicative threshold is arbitrary but useful. Certainly it will bring the cost of implementing the standard down.

But the whole issue of leases, as ever, is riddled with complexities and quirks. The issue of leases versus contracts for services is a good example. If a construction company hires another company to dig out a building site using the provider’s equipment then that is a service. If the company hired the equipment and then used its own team to do it that would be a lease. The whole area of what is a lease and what is a contract for services may prove to be the most challenging of the practical aspects of the standard.

But overall the standard gets the work done and for the standard-setters the important thing is achieving something that provides greater transparency and comparability. Some airlines own most of their fleet. Some lease most of their fleet. IFRS 16 will take away the difference. Balance sheets will show the assets. Investors and analysts will no longer have to make their own basic adjustments. The standard will do it for them.

Hoogervorst also thinks that the changes which the standard brings about will be ‘eye-opening’ for management and that CEOs may be surprised at how many leases they have on the balance sheet and the knock-on effect that has in terms of finance. It certainly means they will also have to take a look at any contracts they have which rely on IFRS statements. And they will then have to make plans to explain to the people concerned, like lenders, how the financial statements will change when the new leases requirements take effect. The risks will not have grown, but they may, on paper, appear to have done so.

There is, as ever, much to be done, not only in understanding but also communicating the impacts. But the final result should be clearer for both preparers and, in particular, investors since a very obvious part of financing will become explicit rather than remaining implicit or hidden in the notes as before.

Related Topics

Correction list for hyphenation

These words serve as exceptions. Once entered, they are only hyphenated at the specified hyphenation points. Each word should be on a separate line.