uunk henk
With the re-deliberations from the International Accounting Standards Board (IASB) for leasing finalised in June, one can start looking at the consequences for individual companies.

In the process, we also find many winners of this new standard.

Although a lot of the technical consequences have become clear, we are awaiting the full picture as still a number of elements of the new standard are blurred.

The IASB is pushing ahead with this standard, finally, and in doing so will be granting relief in several areas.

Particularly items around transition from IAS 17 will see relief - so that the initial application date (yet to be decided by the IASB Board) still can be 1 January 2018.

Whereas companies have to overcome their own transition challenges, there is also much to gain – for most parties involved. So mostly, there is good news to report. But let’s start with the ‘challenges’:

Transition challenges for lessors

Let’s first look at some transition challenges to overcome:

  • Understand the new standard;
  • Choose whether or not to change strategies;
  • Consider which information to provide to clients (marketing) and own staff (training);
  • Make calculations on various impacts (balance sheet, P&L, new disclosure models, ratios and covenants);
  • Review administrative procedures for lease transactions;
  • Adopt changes to (own) software, consult with your lease administration supplier or consider looking for a new one; and
  • Review general ledger accounting, particularly in view of disclosure requirements.

Most of the work can be done by companies themselves, time and resources permitting.

Transition challenges for lessees

Looking at the transition challenges to overcome for lessees, the action list is slightly different and timing and resources requirements may be somewhat more complex:

  • Understand the new standard;
  • Choose whether or not to change ‘funding’ strategies: is leasing still the best alternative? etc;
  • Make calculations on various impacts (balance sheet, P&L, new disclosure models, ratios and covenants);
  •  Selecting or reaffirming accounting policies (as the new standard may allow for change);
  • Review administrative procedures for lease transactions;
  • Adopt changes to (own) software, consult with your general ledger and / or asset administration supplier or consider looking for a new one; and
  • Align general ledger accounting between finance and ‘old’ operating leases, particularly in view of disclosure requirements.

One may be able to oversee the work to be performed, but around the same time other pressing items are on the agenda.

IFRS 15 (revenue from contracts with customers) affects all entities; new standards and guidance developments in the fields of insurance contracts, financial instruments, materiality, disclosure initiatives and the conceptual framework itself only affect some.

Winners

With the above lists of transition challenges, where is the benefit and who is to win from the new standard on leases?

Consider this:

  • There is a new equal-level playing field for all;
  • With all leases required to be on-balance, (except for low value and short-term leases), leasing will prove to be more rather than less attractive compared to own assets or other finance methods; and
  • Finance becomes less relevant due to transparency and focus will move to services.

Equal-level playing field

Once all operating leases of substance are on-balance sheet, a paradigm shift will occur. It’s no longer relevant whether or not to own an asset. So, the focus will move from an asset to other elements of added value.

The ongoing developments in the area of sustainability, water conservation, control over rare minerals and re-use of materials will further boost this shift away from stand-alone assets.

Leasing is an attractive proposition

With current low interest rates, we don’t see it yet, but (at an equal-level playing field) balance sheet totals for lease transactions are structurally lower than for own assets.

When interest rates increase, as is expected over the coming years, an autonomous decline in balance sheet totals will be the effect.

In addition, by outsourcing or concentrating auxiliary activities like accounting, telemarketing sales, webstores, and the like, less assets (on-balance sheet) are required and replacement towards services, not on-balance sheet, will continue.

Services

Individual entities will make choices on the basis of value added on the total proposition. The choice will more and more depend on the additional elements, bundled as a services package.

Perhaps, in the beginning of the new leasing standard, focus is still on managing the asset, but in line with the developments mentioned above, relevance of assets for individual entities yields to the benefit of the service elements. Leasing in the old-fashioned way of operating lease will prosper even further.

Any losers?

There will be just a few.

Those companies holding to assets and asset finance alone, in the first place: keeping the full (undiscounted) asset on the balance sheet or providing just the finance at ever more competitive interest rates will not prove a sustainable route.

Also those analysts of financial statements who will be fully involved and for whom the new leasing standard was fully amended (and therefore cannot complain).

They will lose their grip as leasing is not, and will not be, about the balance sheet. And unless profit and loss accounts and other comprehensive income improve, and become more important than balance sheet presentations, having a new leasing standard will be like a Pyrrhic victory to them.

Finally, the IASB itself.

It transformed IAS17 into IFRS 16 between 2006 and now, only to find that ongoing developments in society will require a Leasing 3.0 by 2020. Nine years of effort since the inception of the leasing project to now only arrive at a standard that systematically will be reducing the relevance of the balance sheet, doesn’t look like progress to me!

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).