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