New accounting standard will change the way companies treat leases on their balance sheets, but could influence a shift away from sale and leaseback

Hayley Kirton
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The new standard is due to come into effect from 1 January 2019 (Source: Getty)

A new accounting standard will change the way companies recognise leases on their balance sheets, and could see businesses alter the way they approach property.

International Financial Reporting Standard (IFRS) 16 Leases, which was published today by the International Accounting Standards Board (IASB), is due to come into effect from 1 January 2019 and will require all leases to be reported on a company’s balance sheet.

At the moment, a distinction is made between finance leases and operating leases and, while the former is included on balance sheets, the latter is not.

The IASB said the new rule would provide investors with a more accurate overview of a company’s lease assets and liabilities and that, while listed companies reporting using IFRS or US GAAP standards currently had roughly $3.3 trillion (£2.3 trillion) in lease commitments, over 85 per cent of these did not feature on balance sheets.

“The new Standard will provide much-needed transparency on companies’ lease assets and liabilities, meaning that off balance sheet lease financing is no longer lurking in the shadows,” said Hans Hoogervorst, chairman of the IASB. “It will also improve comparability between companies that lease and those that borrow to buy.”

While the change will not directly affect cash flow, professional services firm KPMG has said that it could impact how some companies choose to deal with property.

“No one wants to see accounting drive business behaviours – the tail shouldn’t wag the dog,” remarked Brian O’Donovan, UK partner in KPMG’s International Standards Group. “But if accounting consequences are in the mix when a company is considering a deal, then the mix will change. For example, this standard essentially kills sale-and-leaseback as an off-balance-sheet financing proposition.”