Roger Müller

is Assur­ance Part­ner and Zurich office leader at EY. He leads the Finan­cial Account­ing Advi­so­ry Ser­vices as well as the Cli­mate Change and Sus­tain­abil­i­ty Ser­vices. He is an IFRS expert with broad expe­ri­ence in all the main top­ics on the CFO’s agen­da. He leads com­plex engage­ments relat­ed to sus­tain­abil­i­ty, audit and finan­cial account­ing advi­so­ry projects.

Tobias Mey­er

is a Senior Man­ag­er in the Finan­cial Account­ing Advi­so­ry Ser­vices Prac­tice in Zurich. He is an IFRS expert with broad expe­ri­ence in audit­ing and advis­ing nation­al and inter­na­tion­al cor­po­ra­tions. He is respon­si­ble for advi­so­ry projects relat­ed to trans­ac­tions as well as imple­men­ta­tion of new account­ing stan­dards and GAAP conversions.


New reporting standard on leases
Significant impact for companies reporting under IFRS and US GAAP

By Roger Müller and Tobias Mey­er / Illus­tra­tion: Anne Lück

The new account­ing prin­ci­ples regard­ing leas­es will fun­da­men­tal­ly change lease ­account­ing. On the one hand, there will be a sig­nif­i­cant impact on key per­for­mance ­indi­ca­tors, and on the oth­er, the new stan­dard may impact the way lease con­tracts a re ­nego­ti­at­ed going forward.

The Inter­na­tion­al Account­ing Stan­dards Board (IASB) and the US Finan­cial Account­ing Stan­dards Board (FASB) issued new account­ing guide­lines regard­ing leas­es in Jan­u­ary and Feb­ru­ary 2016, respec­tive­ly. Where­as, in the past, most leas­es (but also most rental oblig­a­tions) were not account­ed for (off-bal­ance sheet financ­ing), now all leas­es (e. g., prop­er­ty, machine and air­craft leas­es) must be rec­og­nized in the state­ment of finan­cial position. 

Fun­da­men­tal change in lease accounting 

While, in the past, the leased asset and future lease oblig­a­tions under finance leas­es were rec­og­nized in the state­ment of finan­cial posi­tion, only the annu­al lease pay­ments were record­ed in the income state­ment under oper­at­ing leas­es and future lease pay­ments (or rents) were only dis­closed in the notes to the finan­cial statements. 

In accor­dance with the new guide­lines, the lessee must rec­og­nize the right to the leased asset as a right of use. At the same time, the entire oblig­a­tion from future lease pay­ments is rec­og­nized as a lia­bil­i­ty. Upon ini­tial recog­ni­tion, the present val­ue of the lease lia­bil­i­ty must be esti­mat­ed on the basis of var­i­ous assump­tions (lease term, exten­sion options, indexed rents, etc.). The right of use is amor­tized over the short­er of the lease term or the esti­mat­ed use­ful life. 

Mate­r­i­al impact on key per­for­mance indicators 

By rec­og­niz­ing a ll lease trans­ac­tions in the state­ment of finan­cial posi­tion, the debt-to-equi­ty ratio will increase. The income state­ment is also affect­ed by the change.  Instead of lease and rental pay­ments, record­ed as oper­at­ing expens­es in the past, enti­ties must now rec­og­nize depre­ci­a­tion and inter­est expens­es. As a result, EBITDA and EBIT increase cor­re­spond­ing­ly. In prac­tice, these changes are rel­e­vant in var­i­ous ways, such as in con­nec­tion with busi­ness com­bi­na­tions (e. g., mea­sure­ment using EBITDA mul­ti­ples, def­i­n­i­tion of “net debt” in secu­ri­ties pur­chase trans­ac­tions) and in rela­tion to loan agree­ments (com­pli­ance with covenants, e. g., net debt to EBITDA ratio). The illus­tra­tion above dis­plays the changes in the state­ment of finan­cial posi­tion as well as in the income state­ment fol­low­ing the tran­si­tion from the old stan­dard (IAS 17) to the new stan­dard (IFRS 16). 

In an analy­sis pub­lished in Jan­u­ary 2016, the IASB con­clud­ed that both the debt-to-equi­ty ratio and EBITDA will change sig­nif­i­cant­ly due to the new account­ing guide­lines for leas­es. How­ev­er, the effect will vary depend­ing on the sector. 

We ana­lyzed the impact on select­ed KPIs for com­pa­nies in the Swiss Leader Index (SLI), ex finance, based on the fig­ures pub­lished in 2015. It is esti­mat­ed that the debt-to-equi­ty ratio will increase by an aver­age of 4%, but in cer­tain cas­es may rise by more than 15%. It is also esti­mat­ed that EBITDA will increase by an aver­age of 8%, but in one case there had been a jump of more than 35%. 

Impact still uncertain 

To avoid an exces­sive increase in cor­po­rate in­debtedness, the poten­tial impact on the state­ment of finan­cial posi­tion of con­clud­ing a new lease must be tak­en into account. In the future, lessees will there­fore tend to pre­fer a short­er con­trac­tu­al term. It is also con­ceiv­able that, instead of leas­es, enti­ties will con­clude ser­vice con­tracts in the future under which they acquire a ser­vice rather than a right to use a leased asset. Land­lords and lessors will also have to address the new guide­lines. On the one hand, the changed require­ments will influ­ence the behav­ior of the var­i­ous par­ties in con­tract nego­ti­a­tions, and on the oth­er, they may also impact the owner’s mea­sure­ment of leased assets. 

The new account­ing guide­lines for leas­es will come into effect from 2019. How­ev­er, affect­ed enti­ties would be well-advised to address the impact prompt­ly in light of the pos­si­ble consequences. 

Changes result­ing from the tran­si­tion from IAS 17 to IFRS 16