Since 2006 the International Accounting Standards Board (IASB) has had a project looking at lease accounting. The project arose due to concerns that current accounting standards lack transparency on leasing obligations and do not properly assess leverage and the assets an entity uses in its operations.
Arising from this project in May 2013 the IASB issued an Exposure Draft of a new accounting standard on leases. Should the Exposure Draft become a standard there will be a profound effect on the financial statements of many companies, both lessors and lessees alike.
The key changes suggested and how they could impact you are:
- Recognition of all leases of more than 12 months duration on the balance sheet
As a result of this change many operating leases, including property leases, will be recognised on the balance sheet for the first time as a ‘right of use’ asset and a corresponding lease liability. Whilst this will not impact net assets it could significantly change companies gearing ratios and, for those companies with significant operating lease commitments, net current assets.
- Income Statement treatment to be more dependent on the type of asset leased
The Exposure Draft proposes two different treatments in the Income Statement broadly dependent on whether the lease is for property or not. For property leases the Income Statement charge would represent the total cash paid whereas for other leases the charge would represent an interest element and an amortisation element. Particularly for equipment currently held under an operating lease this would tend to result in a higher Income Statement charge in the early years of the lease and a lower charge in the later years. There will also be an impact on the calculation of EBITDA and other Income Statement ratios.
The proposed changes are only at the Exposure Draft stage and a final standard is not expected until 2014. The IASB are asking for comments by 13 September 2013 and our Financial Reporting Experts Group is drafting a response. If you have any comments on the changes that you would like us to reflect in our response, email Kate Jalbert.
Matthew Stallabrass, who wrote this article, is a Partner at Crowe Clark Whitehill and Chairman of the Quoted Companies Alliance's Financial Reporting Expert Group.