Until recently, lease accounting was quick, effortless, and easy to understand. But times have changed and aggregating and analyzing your lease accounting have become much more complicated.
In January 2016, the International Accounting Standards Board (IASB) issued IFRS 16, ‘Leases’, creating new rules for lease accounts that have been in effect since 1 January 2019. Ind AS 116 lease accounting was also issued, which became applicable for financial reporting on or after 1 April 2019. These lease accounting standards encourage transparency by advocating a single model for lease accounting standards by the lessee and require lessors to classify their leases into two types—operating and finance, while in case of lessee a single approach was to be followed. This small change had turned the world of accounting on its head.
And its impact on lessees is hard to miss. Under the standards, a lease has a whole new, much broader definition. Now it’s all about control and benefit. A contract is (or contains) a lease if it allows the lessee to control the use of an identified asset for a period and reap the economic benefits of the same. This means that the days of lease liabilities being off-balance sheet are gone. Now lessees will have to recognize these contracts’ assets on their balance sheets, with the exception of certain short-term or low-value leases.
Lessors face a different conundrum in the treatment of a lease. In case of operating leases, they continue to recognize the underlying asset. However, in finance leases, the lessor derecognizes the asset and adjusts the net investment to current requirements—acknowledging any profit or loss when the lease goes into effect. The end results? More calculations and larger headaches for the finance department.
But what does all this mean for your business and your accounts? Well, the implementation of the new lease accounting standards will have a significant impact on the business world, including:
- changes in estimates and judgment
- changes in lease contract terms and business practices
- change in financial metrics
- changes in the way an organization communicates with stakeholders.
On a more individual level, the standards will affect:
- Balance sheets: Includes related ratios such as the debt/equity ratio.
- Income statements: Involves recognizing interest expense on lease liability and depreciation on the Right of Use Asset (ROU)
- EBIT and EBITDA: Increases for companies with material leases.
- Cash flow statements: Presents payments that reflect interest on lease liability as operating cash flow.
Organizations across the globe need to re-evaluate how they collate, analyze and report their data. In fact, compliance with the standards may necessitate a total overhaul of your lease accounting methods—which, if done manually, can take up months of valuable time and resources.
In the face of this daunting task, tools like PwC’s Lease Fix are invaluable in helping you streamline the whole process. Lease Fix combines advanced technology with the firm’s in-depth accounting experience to keep you on top of the new requirements. It helps improve data collection, generation of lease summary reports and insight generation, so companies can easily address data challenges, quantify lease rentals, and automate lease calculations. This way, you don’t have to wade through a sea of irrelevant data to find the numbers that matter.
With the use of automated tools such as PwC’s Lease Fix, managing your lease data will once again be as simple as brewing a cup of tea.
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For more details on the solution, please write to us at: leasefix@in.pwc.com, products.india@in.pwc.com
