Let’s fully embrace the new International Financial Reporting Standard (IFRS) 16 for leases!
(Not because of any support (endorsement) forthcoming from the European commission (EC) - nor for scientific reasons)
But rather for the simple reason that the new standard is so flawed that only applying it, as soon as possible, will result in a new standard Leases 3.0.
With current experience, this should be possible just before 2022, when starting early next year with a new Leases project.
“Just before 2022” is relevant as around that time a discussion will arise as to applying the IFRS-for-SME’s version of IFRS 16 for use by small to medium-sized enterprises.
And discussing a standard that also works for SME’s should be the very reason to signal all kind of anomalies in the newly-arrived standard IFRS 16. In fact, a new industry word is born - anomaleases
The new normal
In a world full of disruption, now disruption is being introduced by the “ultimate standard setter” by its introducing a fundamental new standard without proper impact analysis and without allowing for the specifics of the product of leasing.
One initial question remains: was there a need for a product-specific standard for leases?
To remind you, leasing has two distinct characteristics:
● the linking of the finance of assets which are made available for usage by another entity; and
● the direct relation between cash-out and the profit & loss statement.
As the International Accounting Standards Board (IASB) has decided that a new leasing standard was needed to improve on the existing standard IAS 17, one would think that there is room for their product-specific characteristics; otherwise existing standards (like IAS 16: property, plant and equipment) would have done the job.
The outcome is known. Just put all leases on-balance sheet while copying IAS 16 for depreciation purposes and break down cash flows to reflect the interest element, apart from operational or investment parts.
And, by the way: as we have lost sight of the distinctive qualities of leases, please arrange for extensive disclosures. One’s second question automatically is - is this the information that investors and analysts were looking for?
The conclusion so far is that:
● there is no improved transparency, not in the balance sheet, not in the P&L statement, nor in the cash flow statement;
● there will be a lot of costs, not just initially, but ongoing;
●it will produce turmoil for at least the next four years; and
● everybody is unhappy as comparability (see my February article in AFI on just depreciation) and transparency have been lost in the process.
To reduce the negative aura around the new standard, a number of simplifications have been introduced. Some will be beneficial to that purpose, yet, from a scientific point of view, all are abject. It seems that disruption and populism reign!
Assets of low value
The first anomaly is with respect to assets of low value.
The new standard was drafted together with the US’ Financial Accounting Standards Board (FASB). In trying to bring the project jointly to the end, the IASB agreed to a simplification for small assets. For a long time, staff of the IASB kept everybody in the dark as to the limit of the amount to be applied, well understanding that a new bright line might emerge.
Finally, the word came out. US$5,000 - US dollars to accommodate the American team. And guess what? The Americans choose not to allow for an exemption for small assets.
So now, an IFRS standard shows an amount in a currency in which jurisdiction (US GAAP) the exemption does not apply. Meanwhile, the IASB tries to mitigate the discussion on having a bright line by arguing that this amount is indicative and subject to inflation-correction.
The anomalease grows, automatically, further and further.
Would Chinese, Indonesian, Argentine or German inflation be the same over time? And wouldn’t expressing the counter value of US$ 5,000 in local currency be subject to debate, discussion or worse?
Where is the transparency?
Consider - when Brexit comes along, the €-counter value, all the sudden, might shift by + 10%.
Also, when considering assets of low value:
● one can apply this exemption as one pleases: lease-by-lease. Whereas it would make sense to make choices by type of asset in this respect;
● material discussions are over-ruled in the standard. Talk about disruption!
● there will start a shift towards individual contracts per small asset, which is not hard to do in this world of big data. This shift might occur well before the implementation date of the new standard; and
● a disconnect may be foreseen between invoicing (one amount/line per period for all contracts to reduce bank account movements) and reporting data, needed for external reporting purposes.
Any lessee might consider not changing their internal accounting procedures while (disruptively??) applying big (static) data reports from lessors and/or third parties to satisfy auditors and analysts with the proper breakdowns. Who would mind, if the standard setter does not?
The number of anomaleases for just one futile element of the standard already is substantial.
If it were just for this one topic, one might think of an unfortunate flaw that everybody could ignore. Unfortunately, there are more elements that require to be highlighted.
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 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).