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  • New lease accounting rules: Should we worry? Posted on 17 January 2016

    After almost ten years of work (see my blog 9½ Years: The story of a difficult relationship for the intimate history) the International Accounting Standards Board finally published its new lease accounting standard, IFRS 16, last week.

    Should the leasing industry be worried? Some argue that IFRS 16 could actually be a good thing but I find those arguments tenuous in the extreme. Instead let me offer six reasons why we shouldn’t worry because IFRS 16 won’t matter and six reasons why we should be worried that IFRS 16 will harm the leasing market.   

    Don’t worry

    1. IFRS 16 isn’t approved for use in Europe and it won’t be for at another year or so.

    2. The EC might insist on (much needed) improvements before IFRS 16 is approved for use in Europe.

    3. Even when it is approved, only ‘Public Interest Entities’ (listed companies, banks and a few others) will have to use it, 99.6% of companies won’t be affected.

    4. Public Interest Entities will have until 2019 to follow the rules, and if changes are also made to national accounting standards this might not happen until 2023.

    5. These days it’s extremely rare for businesses to use leasing because it might be ‘off-balance sheet’.

    6. Investors and other users of accounts will understand that accounts are changing merely due to a change in the reporting rules and won’t be concerned.

    Worry

    1. The new rules are bureaucracy gone mad, increasing the regulatory red tape that lessees have to deal with, particularly for today’s operating leases.

    2. It’s usual for changes to international standards to be mirrored in local accounting standards that all other companies (i.e. 99.6% of companies have to follow).

    3. The ‘bottom line’ impact of leases depends on so many technical factors that the results could be difficult to predict and explain, possibly making finance directors wary of leasing particularly for today’s operating leases.

    4. Tax rules follow accounting, so either HMRC will require companies to prepare separate accounts using the current lease accounting rules or major changes will be needed to tax rules.

    5. Companies with loan covenants could have problems if they need to renegotiate the terms. 

    6. The public sector rules that currently restrict use of leases might be extended.

    Lease accounting might not sound exciting and the regulatory machinery moves at a glacial pace, but IFRS 16 is likely to be the most significant driver of change for leasing for many years.  It has the potential to lead to major product and structural shifts in the market if it - or versions of it - are rolled out for use by all companies unchecked.

    The best opportunities to mitigate the risks of IFRS 16 are just starting as the IASB was never going to pay much attention to the industry’s concerns. The European Commission, UK Financial Reporting Council, HM Revenue and Customs, HM Treasury, the European Banking Authority and other bodies will all now need to decide how to respond.

    Publication of IFRS 16 last week was only the end of the beginning of the industry’s work to ensure that changes to lease accounting don’t harm our customers and the overall market.

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