Hans Hoogervorst, chairman of the International Accounting Standards Board (IASB), has admitted the process of reforming lease accounting standards has proven "difficult," but said it remained very important.
The IASB has been working with the US Financial Accounting Standards Board (FASB) to create a set of converged leasing standards for some time, and released a proposal to that effect in 2013. These proposed changes proved unpopular however and in January 2014 Hoogervorst said the boards had begun re-deliberations.
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Speaking at the International Financial Reporting Standard (IFRS) Conference in Singapore on 29 May, Hoogervorst explained that most lease contracts fail to be recorded on balance sheets.
"In the industrialised world," he continued, "roughly 50% of listed companies report material operating leases", leaving the remaining half unaffected by the upcoming standard.
He said the IASB’s analysis of the lease standard among 12,000 listed businesses in Europe, Asia and North America showed the use of operating leases was highly concentrated: "Out of the total of 12.000 entities that we analysed, 1000 companies, or less than 10%, accounted for 80% of all the operating leases," he explained.
Within the high-use 10%, operating leases constitute a highly significant source of finance, and the inclusion of lease liability "would lead to an increase of the long-term debt-to-equity ratio from 13 percentage points in Europe through 20 percentage points in Asia."
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By GlobalData"These substantial numbers explain why many investors make adjustments to the balance sheet in their analyses," said Hoogervorst.
He concluded that although the lease standard stands to affect only 10% of listed companies, within the sectors most heavily affected it will foster "much needed insight in the true leverage of companies."
He added the IASB was still working with the US FASB to come to an agreement on how the lease liability should be run off in the income statement, noting "In the next couple of months we should be able to finalise our work."
Overall, countries using IFRS now make up over 50% of the world’s GDP, and are no longer primarily concentrated in Europe; the GDP of non-European jurisdictions employing IFRS totalled over $23tr(16.87tr), compared to the combined EU one of $17tr.
