I started noticing sufferers of ‘leasing fatigue’ a couple of years back after the second IASB exposure draft. The (by then) fifteen years of debate were showing no signs of reaching an end – the majority of people didn’t believe that this topic would ever reach a conclusion (me included).
However…..I hope we are all well rested from our collective fatigue, as the new leasing standard is about to become very real.
We are expecting a final standard out the end of this year (IFRS 16 Leases) with a 2019 application date. Early adoption is expected to be permitted subject to an interplay with IFRS 15 Revenue recognition…and yes the new standard will be subject to EFRAG endorsement for those in the EU.
I know first-hand that there has been a lot of lobbying of EFRAG and outreach and strong feelings (quite rightly) on the suitability of the proposals for endorsement. My personal opinion, is that I don’t believe the IASB would have reached this final stage without being reasonably certain of endorsement.
2019 may sound a long way off, however there is going to be a significant amount of complexity in applying this standard. Potentially a lot of work to initially identify the relevant agreements and then the complexity of what to do with them, once you’ve found them!
The more complex your business and more decentralised, the more complex the hunt for leases will be. After all, few people in a business can sign up to a major lease for a new office building. However a far greater number can enter operating leases or agreements for equipment rentals (e.g. for fork lift trucks, shelving, vehicles, machinery, yellow goods…the list is endless) – and hence, how do you identify these and then track these?
I know from projects I am advising on, the number of relevant leases/ rentals can quickly reach the hundreds for smaller businesses and thousands and upwards for larger businesses.
The new rules will mostly impact lessees (bringing virtually all leases onto balance sheet and changing P&L expenses) and will impact lessors from more of a commercial perspective. We are already working with some lessors looking to redesign their customer leases in anticipation of revised customer needs.
Two types of agreements are expected to be exempt from the new rules; being short term leases (under 12 months) and smaller ticket items (USD5,000 was discussed – could this be the first IFRS with an explicit quantitative threshold?). Although these are very welcome exemptions in reducing the pain of applying the standard, in reality these will not apply to all and the new standard will be still far from a painless.
The new standard will also revise the old ‘IFRIC 4’ (when is an agreement a lease) language – this means any previous IFRIC 4 conclusions will need to be revisited.
We are helping a growing number of clients model the impact of these new proposals as they look to quantify the significant impact on their financial statements, key ratios and profitability – don’t under estimate these impacts!
The leasing changes will also have a big impact in the company acquisition/ disposal deal space where the businesses being bought today, may look fundamentally different come an exit in a few years’ time.
Going forward I will be sharing insights to the practical implications of the new proposed rules – but I urge all to wipe away the ‘leasing fatigue’ induced sleep from their eyes and reach for that very strong coffee….