The consequences may be spectacular.


But let’s start to explore how such an unexpected deliverable came about.

The new standard originated from a deep-felt mistrust in the (missing) representation of operating leases which are, up to now, not reported on-balance sheet and which badly needed accounting repair.

Even the United States’ accounting standard setter agreed to join in a project to fundamentally alter lease accounting guidance.

It should be understood that leases, as products, were introduced in the US about 60 years ago and soon were followed by an US accounting standard which identified two quite different types of leases and which required different accounting methods.

On the one hand, a finance lease, where the ‘finance’ character was most prominent and therefore needed recording, was placed like a loan, on-balance sheet. On the other hand, there was the contract conveying a right-to-use - an asset with little or few resemblances to a loan: the operating lease.

As both types of transactions were called leases, a practical solution was introduced in the form of two distinctive (bright -line) percentages: 75% of the economic lifetime of an asset and total obligatory payments of 90% of initial value. If both percentages were exceeded, a lease was definitely a finance lease. If not, then a lease could be deemed to be an operating lease.

This is simple and clear; except to the International Accounting Standards Board (IASB) which opposes bright-line solutions - and to the analysts, banks and other users of the accounts who increasingly do not have time to digest data and want to be presented with clear facts!

And so, it was argued that lessees were hiding from their balance sheets (operating lease) elements which were believed to essentially be (loan) obligations.

It was the idea of bringing all leases on-balance sheet (but not to the full extent of including service elements) which resulted in the ‘practical expedient’ of allowing the lessee electing to include service elements. It must have been argued that nobody in their right mind would overinflate the balance sheet with services.

Actually, why not?


Companies having friendly bankers, ample solvency and/or rogue investors seeking the highest EBITDA (earnings before interest, tax, depreciation and amortisation) now have a perfectly legal reason to include services in the net present value measurement of lease transactions.

One could even go as far as adding an asset to services to make it a lease; the conclusion gives ample room: … “although fulfilment of a service contract will often require the use of assets, fulfilment typically does not require making those assets available for use by the customer throughout the contractual term”

The reward is: one can apply IFRS 16, rather than IFRS 15 (Revenue from contracts with customers) with possible timing differences in profit take.

A world upside down from what standard setters believed would happen.

The option to elect to include service elements is, again, evidence of the struggle the IASB has to come to grips with leases. The IASB fails to be consistent, afraid of abuse rather than concerned with proper standard setting.

When only chosen for convenience by an entity, its effect is that comparability between entities is far away.

When legally used within the accounting framework, and deliberately chosen to allow high dividend pay-outs, it is outright misleading for the public - while having the implicit consent of the standard setter.

Will it happen?

Experience learns that what might happen, will happen. One day, perhaps even without initially deliberately doing so, but still coming about. After all there are more black swans around these days than you could imagine in times past!

Lehmann Brothers’ default happened less than 10 years ago, after the start of the leases project, but well before the ill-fated IFRS 16 Leases was drafted.

Not to mention Brexit which is still so fresh that predictions on further developments are far too early to make.

My conclusion

Services as a Lease is another anomalease, to be added to the existing list about short-term leases and leases of low value.

Let’s make the world community understand that this standard is not properly fit for application by large companies - let alone when (indirect) impact on SMEs is the result.

As a final word: the new lease standard is proof of the belief by the IASB Board that lease transactions continue to result in another type of asset than assets in own use. So, accounting of leased assets deserves to be different from accounting of assets in own use.

Perhaps a quick start with Leases 3.0 will achieve this?

Henk Uunk held the position of manager financial accounting and reporting at ING Lease Holding from 2004 to 2014. He is chairman of the accounting committee of the Dutch Leasing Association (NVL) and a member of Leaseurope’s accounting and taxation committee since 1992. Uunk is a contributor to the Dutch Accounting Standards Board working group on leases and acts as a consultant to the Dutch Car Leasing Association (VNA).