IFRS16: an accounting standard impacting leasing contracts
Standard IFRS 16 concerning leasing contracts, published the 13 January 2016, will be imposed on active accounts opened as of the 1st of January 2019, pending its adoption by the European Union.
Starting the 1st of January 2019, leasing contracts will be impacted by a new set of accounting standards, known as IFRS16.
These new standards analyse all lease engagements as conferring a right of use on all leased properties (excepting those which are weak in value or leased for a period of less than or equal to 12 months) in exchange for future payments (so called Lease Liability). Rights of use and lease Liability will have to be booked in the balance sheet of the lessees applying the International Financial Reporting Standards.
So the current standard, IAS17, will be replaced by IFRS 16. Why this change?
The new standard integrates the idea of controlled use for the leased property by the lessee and shows up in the accounts the leased property rights of use (Assets), and the obligations of lease payments (Liabilities). “The standards settlers were concerned that financial analysts didn’t have enough visibility on leased assets, notably the important properties such as airplanes and buildings.” Explains Fabrice Bertolle, Arval’s Head of Corporate Accounting and Consolidation.
What are the consequences for clients?
The first consequence will be the recognition of use rights and a lease liability to the lessee’s balance sheets. Also the amortisation of the use rights and the interest on the corresponding liability must appear in the lessee’s profit and loss account. Meaning, instead of a lease payment under IAS17, the cost of lease agreements will be recognised from now on under IFRS16 through a stable amortisation and a digressive interest over time.
Other consequence, the new standard will improve an aggregate named EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortisation). Indeed, the new method of accounting, amortising and interest instead of current general expenses, will mechanically improve this financial aggregate. “In the end, over the duration of contracts, the costs will be exactly the same, while their appearance will be different over time because of the digression of debt interest. Aside from this accounting “unpleasantness”, it must be understood that all long-term leasing operations benefits still remain.” emphasises Fabrice Bertolle.
All companies are not affected
Generally speaking, only listed companies or those not listed but having chosen IFRS (International Financial Reporting Standards) for their consolidated accounts (including their subsidiaries) will be affected by these new standards. Also, and exceptionally, certain countries have opted for the application of the IFRS reference for their local accounting. For these countries, all companies are not systematically obliged to apply this standard either.
The planned schedule is precise, with two dates to keep in mind. The IFRS16 standard will become mandatory starting the 1st of January 2019. However, certain lessees who use the IFRS15 standards (“Revenue from contracts with customers”) will be able to anticipate and decide to apply IFRS16 as of the 1st of January 2018.
Finally, still subject to approbation by the European Union, the new standard requires integration and advance preparation for the consequences of this new leasing contract management. Particularly, this includes a census obligation for the companies on the ensemble of their leasing contracts and the subsequent impacts.