A new lease of life you could do without?

There is hardly a commercial enterprise anywhere that does not lease an asset of some description somewhere in its operations. For that reason, the International Accounting Standards Board’s (IASB’s) recently issued exposure draft (ED) on the accounting for leases is likely to bring about the most wide ranging change that finance departments of companies reporting under International Financial Reporting Standards (IFRS) will have to deal with since the transition to IFRS itself. The ED will bring most leases onto the balance sheets of lessees.

Real estate investors who use the fair value model under IAS 40 (Investment Property)

will be exempt from applying the new leasing standard. The significant impact will be on tenants who will have to account for their lease obligations under a new model which will bring both an asset and an obligation onto their balance sheet and introduce complexity to a previously relatively simple subject. Tenants may seek to shorten leases and reconsider contingent rentals as a consequence of the proposed changes, because, broadly, the longer the lease the greater the impact on the tenant.

Companies reporting under UK Generally Accepted Accounting Practice (UK GAAP) are not yet affected. However, with the future of UK GAAP currently in a state of flux, and given the UK’s Accounting Standards Board preoccupation with aligning as far as practicable UK GAAP with IFRS, it might be expected that the principles embodied in the ED will ultimately be reflected in UK GAAP at some point.

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