The IASB has recently issued its new international accounting standard on leases, IFRS 16 Leases, which will be effective for periods of account beginning on or after 1 January 2019.
For lessees, the new standard has important implications, bringing most leases on-balance sheet, while eliminating the dichotomy between finance leases and operating leases. IFRS 16 introduces a single accounting model that requires lessees to recognise assets and liabilities for all leases with a term of more than 12 months, unless the asset is of low value. In addition, lease assets will have to be depreciated separately from interest liabilities in the income statement.
Where existing facility agreements have incorporated the current IAS 17 lease accounting methodology, reconciliation differences may arise following adoption of IFRS 16. Parties will have to review existing facility agreements to consider if revisions to accounting standards implemented during the life of a facility agreement are contemplated and, if so, how such changes are facilitated, for example through the use of reconciliation mechanisms. Other relevant considerations include whether a facility agreement contemplates the use of “frozen GAAP” or “floating GAAP”.
IFRS 16 will lead to a significant increase in the reporting of net debt in certain sectors, including the airline industry. Consequently, the new standard is likely to significantly impact aircraft lessees’ financial ratios, in particular leverage and solvency ratios, and consequently banking covenants. Depending on how broadly “financial indebtedness” is interpreted, there is a risk that all leases may now fall within its remit.
Lessor accounting under IFRS 16 Leases is mostly unchanged.