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June 8, 2016

Conference report: Accounting for leases – Radical changes for IFRS reporters

By Brian Cantwell

Globally, about three trillion leases will come onto the balance sheets of listed companies in 2019, and a quarter of those leases will be in Europe. It is estimated that £200bn ($290bn) worth of leases will come onto balance sheets of UK retailers.

At a briefing at the Chartered Accountants’ Hall hosted by the Institute of Chartered Accountants of England and Wales on 10 May, Kathryn Donkersley, senior technical manager at the International Accounting Standards Board (IASB), and Kirsty Ward, accounting advisory partner at PwC, highlighted the exemptions for listed companies and said they could influence behaviour.

"Leasing is done for good economic reasons, and those economic reasons are still there. I’m not sure that it’s going to be necessarily different for larger organisations versus middle-ticket organisations," said Ward.

"I think it probably depends on the level of debt that they take on board and where they are in relation to their debt covenants.

"In terms of the behaviours, I expect we will see more looking at how things can be structured to be a service; we will be looking at more turnover-based leases, lease versus buy decisions being revaluated, splitting assets up into smaller components if they can. I think there will be lots of areas where companies will investigate their options if they are looking to reduce their debt."

In terms of what is a service or what is a lease there is a lot work to be done, it was agreed at the briefing. ‘Componentisation’ (explaining assets on the lease and any additional assets) for assets and how lessors and lessees draft the lease contract will be key.

Second elements in the contracts can be strict; even a property lease can be called a service, and it will make a huge difference, the accountants said. The amount of debt can be reduced. We will see that leasing contracts will change over time: from leases to services.

Read the article in full: Accounting rules could incentivise lessees to seek services over leases

Brian Cantwell is editor of Timetric’s leading industry title Leasing Life, where this article was first published.

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