Learning the Lessons from IFRS 16

It is now 5 years since companies listed on stock exchanges in Europe, and a small number of other companies, have been required to report on their use of leases using IFRS 16, the new international accounting standard. The standard setter, the International Accounting Standards Board (IASB), is about to carry out a ‘post-implementation review’ to assess how things have gone.

The European Financial Reporting Advisory Group (EFRAG), the body that advises the European Commission on whether international standards are in the public interest in Europe, has already started to prepare its input to the IASB review. In April, Leaseurope’s Accounting and Taxation Committee submitted evidence to EFRAG, and in May Leaseurope met with the EFRAG team responsible for the review.

Leaseurope told EFRAG:

• As predicted, there has been no ‘IFRS 16 effect’ on demand for leasing. This confirms that large companies in Europe were using leasing because of the real operational and financial benefits it delivers, not the fact that operating leases were previously ‘off-balance sheet’ (not shown as the lessee’s assets or liabilities).
• For most lessees, the cost of implementing IFRS 16 was mainly ‘one-off’ systems expense and management time. As the users are large companies, usually with large accounting departments used to implementing new accounting standards, the change did not cause any major disruption. But if similar rules were to be extended by national standards setters to small and medium-sized companies, there is a real risk that implementation costs could reduce business investment.
• We believe investors still look at the assets leased by companies, rather than using the new figures in accounts that are difficult to compare between companies (an asset on a short lease has a much lower value than an identical asset on a longer lease).

We are keen now to provide more evidence to EFRAG and to the IASB for their review, particularly on whether IFR6 rules cause any complications for service-based contracts where the assets in use may be changed during the term of the agreement (as the IFRS 16 ‘substitutability’ rules are complicated and may be difficult to use).