Published on 13 December 2011

The following was published in Asset Finance International on 13 December 2011.



New lease accounting rules are looming on the horizon, for all companies in most of the mature leasing markets of the world. They will affect Europe, North America, Australasia and may other jurisdictions where international financial reporting standards (IFRS) are in use – or, as in India and Japan, in the process of being adopted.

Convergent changes in the lease accounting rules, both in US generally accepted accounting practice (GAAP) and in IFRS, will become a significant systems issue for lessors (of both equipment and real estate) in the coming years.

Ralph Neuff, client relationship director for CHP Consulting, explained:

“We still do not know exactly when the new global accounting standard will become fully effective. The standard setters said some months ago that it would not be before January 1 2015 – but at that point they were aiming to have it finalized before now. Since then they have agreed to re-expose the draft for further consultation, and it could be another year from now before it is finalized.

“So they can hardly now make the effective date earlier than the start of 2016. Yet that will still be tight timing for all the required accounting adjustments for equipment lessors. All the companies affected will have to produce some comparative accounts on the new basis for reporting periods prior to the effective date. For US-listed companies those comparatives will have to cover a two-year period.”

Although the main driver for new accounting rules was to get all leases on to the balance sheets of lessees, the standard setters – the International Accounting Standards Board (IASB) in joint sessions with the US Financial Accounting Standards Board (FASB) – are also proposing big changes on the lessor accounting side. Their proposed new lessor accounting model has changed a great deal in recent deliberations, in response to widespread criticism of proposals in the first exposure draft last year.

However, Neuff believes that the “receivable and residual” (R&R) model, tentatively agreed by the Boards over the summer of this year, will form the basis of the new rules. He added: “In the case of finance leases R&R does not bring fundamental changes to existing rules, especially in US GAAP where residual value (RV) accounting will be much the same as now. Where RV guarantees are involved there will be some change in accounting for those, but these should be manageable.

“Existing software programs such as our ALFA Systems will be able to handle the accounting changes for finance leases with some upgrading. Yet for lease portfolios like vehicle contract hire, currently accounted for as operating leases by the lessor, the changes will be much more far reaching. R&R will be very different from the present operating lease accounting, where just the underlying asset is recognized on the balance sheet and lease income closely matches the cash rental profile.

“Many of those lessors will have to switch from using simple spreadsheets to full lease software systems. Contract hire players are likely to find the new accounting rules much more challenging than financial sector lessors.”



Reproduced by permission of the publisher.