Leasing is a common financial solution for some organisations. It allows companies to dispose of equipment without having to raise funds or make major investments in plant and property. What are the new accounting standards for lease management ?
All about the lease management standard!
The new standard deals with leases. It replaces the old standard, called “IAS 17”, which accounted separately for certain assets as “finance leases” and “operating leases”. The former are recorded in the balance sheet as quasi-acquisitions, while the latter are not. This boundary was considered to be less efficient and subject to manipulation. With IFRS 16, all leases are treated within the same institution : the asset is then recorded on the asset side of the balance sheet with essentially a liability with a financial commitment held by the company. As a result, the income statement (cash flow statement) is also impacted: the company must then depreciate the asset by recording the financial charges on its debt according to Lease Insight.
What are the key points to consider in this change?
Given the lack of similarity in the IFRS treatment of finance and operating leases, some companies may have used methods that favour “short” leases or sale and leaseback contracts so that these transactions do not appear on the balance sheet. This IFRS 16 was created to prevent such concealment. The basic principle is to remove any distinction between operating and finance leases. Henceforth, apart from all one-year contracts and contracts relating to low-value assets, which will continue to appear off-balance sheet, other leases will have to be recorded on the balance sheet by recording an asset representing a right of use and a liability representing a debt in respect of the obligation to pay the lease payments.
What is the impact of this new standard on lease management?
The accounting standards IFRS 16 and ASC 842, defined by the North American FASB (Financial Accounting Standards Board) and its global equivalent, the IASB (International Accounting Standards Board), will considerably change the way each lease will be accounted for in the financial statements of companies as well as in their balance sheets. These standards, IFRS 16 and ASC 842, are the result of an expectation of greater transparency in the accounting for different types of leases.