Trésorier/Treasurer magazine - N°93 - Apr/May/Jun 2016 - (Page 14)

From 17 to 16 reLEASE of the new LEASE accounting standard LE MAGAZINE DU TRESORIER / TREASURER MAGAZINE - N°93 - APR / MAY / JUNE 2016 Release (Pet Shop Boys) 14 The IASB (International Accounting Standard Board) has developed its new long-announced lease standard, i.e. IFRS 16, which will supersedes the well-known IAS 17. More than a figure, this new standard will completely change the approach of lease accounting. It is a standard on which both accounting Boards, international and US, have worked jointly on. By the way, the FASB is expected to be released soon in 2016. However, corporations are required to apply IFRS 16 from January 2019. Of course, as often, preparers can opt for an early adoption before that date but only if they also apply another IFRS, i.e. 15, on Revenue from Contracts with Customers. Both Boards came to the same conclusions in many areas of lease accounting with the major change on reporting all leases on balance-sheet, the way to measure lease liabilities and most importantly how to define a "lease". The changes are substantially impacting lessee accounting and IFRS 16 generates little changes for lessors. This huge project started in 2005, when SEC estimated off-balance sheet leases at circa 1,25 trillion Dollars. Once again, the lack of transparency on information related to lease obligations pushed Boards to act and work on a solution to better capture the leasing liabilities. A preparer, i.e. the lessee, must recognize assets & liabilities arising from all leases. The Boards wanted to ensure the comparability of financial statements of companies leasing assets to those borrowing to buy assets. They eventually wanted to apply the "substance over form" principle and to improve as a whole financial reporting for leases. guesswork when calculating these substantial lease obligations. The off-balance sheet lease financing is no longer lurking in the shadows of financial statements. Eventually, Hoogervorst is convinced it will improve comparability between companies from similar sectors. Now all lease expense treatments will be aligned. IASB is certain that some listed companies will be more impacted than others. They accept the fact that some financial covenants and ratios will be slightly impacted. Nevertheless the economic position or commitments to pay cash will remain the same. As always, the "accounting guardians" concluded that benefits of IFRS 16 outweigh significantly costs. The investors will be exempted to make lots of adjustments and financial retreatments. Will it facilitate a better capital allocation by enabling better credit and investment decision-making, as claimed by the Board? Who knows...? « Please, lease me » (to paraphrase the Beatles) The major former difference between leases was, on one side the Financial Leases focusing on identifying when a lease is economically similar to purchasing the asset being leased (i.e. when similar to purchase the underlying asset, finance or "capital" lease should be reported on balance sheet) and on the other side, the Operating Leases, reported off-balance sheet, for leases similar to service contracts with rental expense booked into the income statement. In the new IFRS 16, the IASB eliminates this classification of leases in lessee's balance sheet and income statements. All leases will now be accounted for as financial leases under IAS 17. Lease revamping IASB has completely revamped its standard for leasing in order to enter (as they said) into the 21st century (whatever this means). IFRS 16 will replace some accounting requirements introduced roughly 30 years ago. The Board claims that it is no longer considered fit for purpose and that a major revision of the way in which companies account for leases was necessary. It is obvious that it provided an important and flexible source of funding. However, the old lease standard made it difficult for users to get an accurate picture of corporate's lease assets and liabilities (e.g. airline or shipping companies). Some surveys demonstrated that up to 85 percent of leases do not appear on balance sheets of corporates. The distinction between financial leases and operational leases is somewhat arbitrary and artificial. The users must with IAS 17 estimate the effects of all off-balance sheet lease obligations, which lead too often to overestimating liabilities. According to Hans Hoogervorst, chairman of IASB, the new requirements mean the end of IFRS 16, will supersedes the well-known IAS 17. More than a figure, this new standard will completely change the approach of lease accounting

Table of Contents for the Digital Edition of Trésorier/Treasurer magazine - N°93 - Apr/May/Jun 2016

Cover
Table of contents
EDITORIAL
FINANCIAL HIGHLIGHTS Luxembourg Tax News
INTERVIEW David Blair - How should we set up an efficient KYC Process?
FOCUS
IFRS 9: Hedging - Treasurers will love it
From 17 to 16 reLEASE of the new LEASE accounting standard
Block chain - Is this buzz word turning into a reality?
Bank Single Gateway, the Plumbing of Bank Connectivity
FORUM
Geopolitical threats for the year ahead
Treasurers proceed with caution
Des difficultés en série pour les nouveaux entrants
Easing the Burden - Is a global KYC standard needed?
European trade repository of the year
La dette senior Européenne, un regard nouveau sur l'obligataire
CORPORATE FINANCE
Stay connected with cloud treasury technology
From stone age to straight through processing
Differentiators for treasury management systems
Complete securities financing solutions for corporates
A full and balanced "meal" for your retirement?
15 MINUTES WITH FinMetrics
THE FINANCIAL RISK OBSERVATORY
NEWS
LIFE BEYOND NUMBERS

Trésorier/Treasurer magazine - N°93 - Apr/May/Jun 2016