Breakfast Meeting on the Changing Landscape on Accounting for Leases

 

AMCHAM’s Tamil Nadu Chapter breakfast meeting for July was held on the 24th in Chennai on the ‘Changing Landscape on Accounting for Leases’ featuring guest speaker Mr. Sandip Khetan, Partner, Assurance – EY. Mr. Sandip Khetan set the context for the meeting by saying that the international statutory bodies responsible for financial accounting have decided to put the leash on leasing. The Institute of Chartered Accountants of India recently issued a new accounting standard – IndAS 19 on leases. The EY presentation detailed the various challenges and solutions in the new accounting standards that must be followed. The new leasing standards will pose a number of challenges for businesses with a substantial number of operating leases even before the effective date.

 

IFRS 16 – leases (applicable from January 1st, 2019) will change the accounting treatment of leases significantly and will require lessees to recognize assets and liabilities for most leases on their balance sheet at present value of lease payments. This will result in higher EITDA as the lease expense will now be split as amortization and interest cost in the statement of profit and loss.

 

The key challenge for lessees will be identifying all the lease arrangements that exist and gathering all the required data to get the leases to the balance sheet. The new standard will affect many activities across the organization like procurement, IT, internal audit and finance functions. Since inventory of all leases has to be created on transition, significant changes to systems and processes may be required. There are some impacts which cannot be quantified yet like changes to the tax treatment of leases until the tax department comes up with regulatory guidance.

 

The new lease standard under US GAAP (ASC 842) is also applicable from January 1st, 2019 for public business entities (January 1st, 2020 for other entities). The ‘Day 1’ accounting for leases under US GAAP (ASC 842 – Leases) is similar to IFRS 16 where most of the leases are recognised in the balance sheet. However, there are significant differences in ‘Day 2’ accounting. The major difference is that under ASC 842, lessee is still required to classify the leases as either operating lease or finance lease and the operating leases expense will continue to be straight lined in the income statement.

 

In a nutshell, the above changes will pose a significant challenge for companies reporting under both IFRS and US GAAP. In summing up, it is important for all corporate business houses to first get an inventory of all leases that they have, both financial leases and operating leases. This would be the first step and this is the biggest challenge. The meeting came to an end with an interactive session with all the participants.