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Return to: Home > Comments > Comment: IFRS 16 will dramatically change the accounting for the lessees but not for the lessors

Comment: IFRS 16 will dramatically change the accounting for the lessees but not for the lessors

Ebner Stolz partner Uwe Harr

Ebner Stolz partner Uwe Harr explains why the recently release leasing standard will impact the accounting for the lessees.

The IASB recently published IFRS 16 leases. The new rules for leasing contracts do not materially change accounting for the lessors, who continue to recognize leasing assets or financial receivables (depending whether control is transferred to the lessee).
However, the new leasing rules dramatically change the accounting for the lessees.

The concepts of classifying leasing contracts as operate or finance lease will be abandoned completely. For financial years beginning 1 January 2019 latest, lessees need to recognize leasing assets (right of use) and financial liabilities.

An off-balance accounting will be only possible for short-term (leasing contracts less than 12 months term) and small-ticket leases.
This will strongly affect the balance sheets of the lessees; especially the equity-ratio will decrease.

This might result in higher hurdles for financing either at the stock exchange or private capital markets, as the investments in companies with high finance leases might be less attractive in future.

Furthermore, financing contracts might be negatively affected as covenance breaches can occur due to higher financial liabilities.

Last but not least, the new leasing rules might affect the lessor industry strongly, as one of the major reason for leasing instead of financing an investment was the off-balance accounting for the lessees.

As the new rules need to be adopted in 2019 the companies (especially the lessees) need to start with the implementation of the new leasing standard shortly.

Depending on the number of leasing contracts the one-time implementation costs might be noticeable and time-consuming. Affected will be purchase department, contract management, legal department, finance department, accounting, controlling and capital markets communication. The ongoing administration expense will also increase for lessees.

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