Jonas Enström of Burland Energy: “IFRS drops a lease bombshell”

The new IFRS 16 Leases will totally change balance sheet reporting
 
 
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Jan. 26, 2016 - PRLog -- Geneva, January 26, 2016:  As anticipated, the IFRS 16 Leases project was finally issued on January 13th, 2016 and will be effective from January 1st, 2019.

We have now studied the full analysis describing the changes to be adopted. The following is a short summary of the implications as released by IFRS.

The changes

-          The biggest change introduced by the new Standard is that leases will be brought onto companies’ balance sheets, increasing the visibility of their assets and liabilities.

-          IFRS 16 removes the classification of leases as either operating leases or finance leases (for the lessee—the lease customer), treating all leases as finance leases.

-          Short-term leases (less than 12 months) and leases of low-value assets (such as personal computers) are exempt from the requirements.

-          IFRS 16 Leases was issued on 13 January 2016.  It replaces IAS 17 Leases.

-          The new Standard is effective 1 January 2019.  Early application is permitted (as long as the recently issued revenue Standard, IFRS 15 Revenue from Contracts with Customers is also applied).

The benefits

-          Improved comparability between companies that lease and companies that borrow to buy assets

-          More faithful representation of a company’s assets and liabilities

-          Increased transparency

-          Removes the need for most investors, credit rating agencies and others to make adjustments (analysis shows that common-practice adjustments often over-estimate, but sometimes under-estimate, the value of off balance sheet leases).

What does this all mean to Burland Energy SA UPSaaS™ customers?

UPSaaS™ program allows our clients to benefit from fully conditioned, fully resilient (backed up) uninterrupted electrical power to mission critical environments and has all the accounting benefits of booking the related costs to the operational expenditure(OPEX) and avoiding upfront investments and asset depreciation.

The UPSaaS™ program was developed with these accounting changes in mind anticipating any negative balance sheet impact

The numbers

-          US$3.3 trillion: listed companies around the world currently have around US$3.3 trillion of lease commitments (future payments).

-          Over 85 per cent: of those commitments do not appear on the company’s balance sheet.

-          US$1.25 trillion: in 2005, the US Securities and Exchange Commission estimated that US public companies had approximately US$1.25 trillion of lease commitments “off balance” sheet.

-          1 in 2: almost half of listed companies using IFRS or US GAAP will be affected by the lease accounting changes.

-          66 times value of debt: analysis of some retailers that have gone into reorganization/liquidation shows that the value of “off balance sheet” leases was almost 66 times the value of “on balance sheet” debt.

-          1,700: the IASB has received over 1,700 comment letters on its consultations during the standard-setting process (one Discussion Paper, two Exposure Drafts)

Who will be affected?

-          Some industry sectors will be more affected by the new Standard than others: airlines, retailers and travel/leisure are expected to be most affected. Future payments of “off balance sheet” leases in these industry sectors equate to almost 30 per cent of the total assets (on average).

-          There are also considerable variations between companies within an industry sector:  for some airlines, the value of their “off balance sheet” leases is equivalent to more than 100 per cent of the value of the airline’s total assets.

More detailed information can be found at http://www.ifrs.org/Current-Projects/IASB-Projects/Leases/Documents/IFRS_16_effects_analysis.pdf

What Next?

For more information on the UPSaaS™ program, please visit www.burlandenergy.com or contact richard.vass@burlandenergy.com for a discussion.
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Tags:UPSaaS, Ifrs, Leasing
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