A global survey of 2,300 businesses in 36 economies by Grant Thornton found that a large majority of businesses hold leases, as coming lease accounting changes start for some companies in 2018.
“In January 2016, the International Accounting Standards Board (IASB) issued IFRS16 Leases, which will fundamentally change how current operating leases are accounted for, bringing many leases onto the balance sheet of lessees. The data shows that the coming new lease accounting standards will impact millions of businesses around the world,” said Jake Green, partner and head of financial reporting at Grant Thornton UK.
“The new standards will necessitate updates to existing financial accounting policies, procedures and systems. Businesses will also need to implement new processes and controls to ensure compliance with the new accounting standards,” said Green.
In the UK, the Finance & Leasing Association (FLA) estimates that asset finance represented more than £30bn (£32.74bn) in capital expenditure in 2016, and accounts for almost a third (33%) of all UK capital investment.
According to the European Federation of Leasing Company Associations, Leaseurope’s latest annual survey (2015), the UK represented the largest leasing market by value in Europe with 24.4% of the market.
The survey found that the countries with the highest proportion of businesses holding leases are Sweden (90%), US (89%), France (88%), UK (87%) and the Netherlands (82). Globally, 70% of businesses hold leases.
Countries with the most leases on average for each business are Japan (63), US (47), Canada (42), the Netherlands (37) and Germany (37). Globally, the average business holds 31 leases.
Australia (92%), Philippines (88%), Spain (84%), Finland (84%) and US (81%) are the most confident in determining which of their contracts meet the new definition of a lease. Globally, confidence drops to 62%, with notable trailers in Sweden (42%) and France (53%).
While countries like Australia (87%), Turkey (81%), New Zealand (72%), Philippines (61%) and Nigeria (59%) are leading the pack, only 38% on a global basis have begun the process to recognize leases on their balance sheet.
Businesses in Spain (97%), Australia (97%), Philippines (96%), US (95%) and the UK (94%) are the most confident that they will be in compliance with new lease guidance once required. Notable large countries with lower confidence are Japan (31%), France (54%), China (55%) and India (67%).
Check for bank loan covenants
“Businesses need to be aware of the changes to their balance sheet and income statements that new lease accounting standards will create and how that will impact existing loan covenants, as well as tax cash flows and distributable profits, amongst other things” said Green.
In an earlier global business survey by Grant Thornton, 58% of businesses had bank loans, and of that group, 50% had debt covenants which can make the loan repayable on demand if broken. In the US, 65% of the businesses had bank loans and 76% had debt covenants; in the UK, 57% of the businesses had bank loans and 54% had debt covenants; in Canada, 61% of the businesses had bank loans and 66% had debt covenants; and in Australia, 43% of the businesses had bank loans and 64% had debt covenants.
Steps businesses should take to prepare
Grant Thornton warned that most companies will need to consider making changes in response to the new lease standards.
It recommended that business check their;
- Accounting policies and disclosures;
- Application of judgment and estimation
- Systems to capture, process and maintain new lease data and for ongoing maintenance
- Related internal controls that will require updating, if not overhauling, to reflect changes in accounting policies and processes
- Income and other taxes
- Debt covenant compliance, tax cash flows, ability to maintain dividend policies
Tarun Mistry, partner and head of the leasing, asset and consumer finance team at Grant Thornton UK LLP, said: “The well-developed lease financing market in the UK has proved a valuable resource for many companies as they’ve grown. By making prudent growth investments, whilst balancing cash-flow concerns, leasing has provided UK businesses with a flexible option to deploying their capital. Businesses need to be on the front-foot with the upcoming changes to the accounting treatment of their leases in order to avoid potentially costly errors.”