Leasing is an important financial solution that many companies resort to so that they can use property, plant and equipment without incurring major initial cash outflows. Under the existing rules, lessees generally usually recognise lease transactions either as off-balance-sheet operating leases or on-balance-sheet finance leases. Under the new standard, lessees will have to account for just about all leases on the balance sheet. This will reflect their right to use the asset for a period of time and the associated liability to pay the lease instalments. The accounting model for the lessor remains more or less unchanged.
What´s the issue?
Since just about all companies use rentals or leasing to get access to assets, most will be affected by the new standard. Balance sheets will grow, leverage ratios will be eroded, and capital ratios will decline. Both the expense character and the recognition pattern will change. The new standard will impact almost all common financial metrics such as gearing ratio, current ratio, asset turnover, interest cover, EBIT, operating profit, net income, EPS, ROCE, ROE and operating cash flows. This may have knock-on effects on an entity´s arrangements with different stakeholders such as banks and lenders, investors and analysts and employees, and prompt them to reassess certain lease versus buy decisions in the future. The impact on the accounting and financial levels is only the tip of the iceberg. These rules are so pervasive that they may require organisations to transform their business processes in many areas including finance and accounting, IT, procurement, tax, treasury, legal, operations, corporate real estate and HR.