IFRS 16, new regulations of the International Financial Reporting Standards for leases, will become effective as of January 2019. Consequently, operating leases will be no longer recognised off-balance-sheet by lessees applying IAS/IFRS.

Hence, there is not much time left for analysis of the concluded lease contracts, but also rental, tenancy and similar agreements which may satisfy the criteria of a lease according to the new standard. Pursuant to IFRS 16, a contract is, or contains, a lease if it conveys the right to control the use of an identified asset for a period of time in exchange for consideration.

As a result, the new standard will cause that regardless of the type of a lease contract (operating or financial), lessees will be obligated to recognise the right to use a given leased asset under assets, and the discounted value of future payments with the buy-out, if any, of the leased asset under liabilities. Instead of recognition of lease payments, the costs of lease contracts will be taken into account by the straight-line depreciation or another systematic method which reflects better the manner of spreading in time the benefits derived by the user. Depreciation of the rights of use and interest on that liability will be disclosed in the profit and loss account of the lessee.

Under certain conditions IFRS 16 allows simplified approaches to short-term contracts concluded for a period of up to 12 months and contracts with the leased asset of a small value (the Committee’s recommendation shows the maximum amount of USD 5,000 at the time of conclusion of a lease contract). In such case, the user may not apply the requirements of IFRS 16 regarding the recognition, measurement and presentation of short-term lease contracts in financial statements.

A change of the standard will affect to a significant degree companies from the TSL sector, leasing high value assets such as: aircrafts, trains, ships, real property, tractors and semi-trailers. According to currently applicable guidelines, there is no emphasis on separating a service from operating lease because it does not have a significant impact on the accounting treatment.

Problems may arise also with determination of proper values of the lease itself. The practice used to date shows that services of the lessors take a form of comprehensive performance, covering also insurance, maintenance its. services. When regulations of the new IFRS 16 come into force, it will be necessary to separate such performances.

The new solutions of IFRS 16 with respect to presentation of lease payments and their recognition under the new standard will contribute to worse leverage ratio, lower effectiveness and increased balance sheet total. On the other hand, EBITDA will go up because instead of rental costs companies will recognise costs of depreciation and EBIT, as a part of costs connected with a lease contract will be presented under financial expenses. The results of statistical research available on the market shows that the average increase in debt and EBITDA in the TSL sector will amount to, respectively, 24% and 20%. So the regulations may have a significant impact on agreements with various interested parties, such as banks (covenants in credit facility agreements), lenders (credit ratings and lending costs), investors (changes of behaviour on financial markets). We may assume that in future those factors may play an important role at selection of the type of financing by companies.

Michał Drzastwa, Tax Consultant, ATA Tax Sp. z o.o.