The IFRS 16 effective date is January 2019, but in some cases changes may already need to be applied. George Tonks, partner at Invigors EMEA, asks if the new lease accounting standard is clear enough to lessors, and whether the market is ready.
It now seems a long time since IFRS 16 was finalised in January 2016, and even longer since moves to put operating leases on balance sheets started. But are lessors really ready for the changes it will bring – in some cases from January 2018?
We know that IFRS 16 – and the corresponding US standard – will put operating leases onto lessees’ balance sheets, change the timing of their rental expense costs and alter presentation in their accounts, potentially affecting performance metrics.
Apart from intermediate lessors, the effect on lessor accounts is limited to presentational points, although lessors need to address issues where they are themselves lessees – for example for their offices and IT.
But for some lessors the effect has been lost in the technicalities. It is lessees which are affected, and that means a reassessment of the leasing products and structures they need. Lessors should be responding to IFRS 16 through their marketing, sales and commercial teams, rather than simply leaving it for finance to deal with as an accounting change.
And yes, the effective date for IFRS 16 is January 2019 but, depending on choices made by the lessee, that can mean restating accounting numbers from January 2018. On top of that, all leases running in 2019 will need to be considered, including, for example, any three-year lease starting today.
However, there was some good news in 2017 with the UK Financial Reporting Council deciding to defer its own consideration of whether to amend the accounting standards used by small and mid-sized UK businesses to reflect IFRS 16.
Many lessors have been working on their product offerings, looking at the impact of IFRS 16 on their lessees and the potential knock-on to both demand and information requirements. Of course, lessors can be flexible and offer short-term leases, but what is the effect for pricing and for the lessor’s own profitability? Also, some lessors have been looking at providing service agreements rather than contracts falling within IFRS 16’s definition of a lease, but that is not for everyone and brings its own complications.
Meanwhile some requests from lessees for additional information have been rejected where this is considered commercially sensitive.
In all of these a holistic approach is required, rather than focusing on just one part of the business. While lessor finance teams will need to support their colleagues on the technical issues around IFRS 16, they will undoubtedly have a higher profile in dealing with IFRS 15 (Revenue) and IFRS 9, both of which take effect from January 2018.
Lessors that provide additional services, such as maintenance, need to readdress allocations of rentals to comply with IFRS 15. For some companies this will affect the timing of when profits are recognised in their accounts.
IFRS 9 is a lengthy and complex standard, but for asset finance companies the focus is on recalculating provisions in line with the ‘expected loss’ requirements. Many companies are expecting the adoption of this standard to reduce their distributable profits.