New Accounting Standard Shines Light On Leased Assets

A new international accounting standard that came into effect at the beginning of 2016 is already transforming how companies around the world think about their balance sheets.

First, the London-based International Accounting Standards Board (IASB) and shortly thereafter its US equivalent, the Financial Accounting Standards Board (FASB), issued parallel, although not identical, rules about how corporates are to report lease obligations on their financial statements. “Leases are being brought into the bright light of the balance sheet,” explains Kimber Bascom, KPMG’s global International Financial Reporting Standards (IFRS) leasing standards leader. “They are no longer [to be] hidden in the shadows of the footnotes.”

According to the IASB, 85% of all lease commitments that use the IFRS or American Generally Accepted Accounting Principles (GAAP) are not properly accounted for in companies’ annual statements. These commitments are estimated to be worth some $3.3 trillion.

Those with the largest portfolios of leases are likely to feel the biggest impact from the new rules. Generally, however, the new requirements will expand a company’s balance sheet relative to its equity position. Transportation, retail and utilities are likely to be among the industries most affected because of their reliance on leased assets. As for the countries with the most substantial leasing activity, Bascom says the US is way up on the list, alongside the UK. Hong Kong too features prominently in this group, because of how property ownership is regulated there.

Accountants are understandably concerned about the amount of extra work the new standard may entail. But they also see it as an opportunity. “This is not just an exercise in compliance, it is also an exercise in managing the balance sheet,” says Bascom. “There are levers that companies can still pull to affect the extent of the change to the size of their balance sheets. So it is important that they start looking, sooner rather than later, to the [portfolio] and terms of their leases in this new light.”