European Commission to Review Suitability of IFRS 16 Changes to Lease Accounting

After a decade of deliberations and redrafts, the new lease accounting standard IFRS 16 has come under scrutiny again, this time by the European Commission to review if IFRS 16 will be conducive to the European public good.

The European Commission laid out the scope of the report in a letter to the European Financial Reporting Advisory Group (EFRAG). This was discussed at EFRAG’s recent board meeting on 16^th June by the commission's acting director for investment and company reporting, Erik Noteboom.

IFRS 16 represents the largest change to lease accounting in 30 years and will effectively eliminate the current differentiation between finance leases and “off-balance sheet” operating lease as most leases will need to recognise arising assets and liabilities on a straight line basis on balance sheet.

As part of the implementation process, the new lease accounting standard will need to be approved and adopted for use in Europe; EFRAG’s assessment and advice forms part of this process.

"It is important that the full effects of IFRS 16 are considered before the new standard is accepted for use in Europe. The immediate impacts may be limited to mostly the largest companies who will usually have the accounting resources and expertise to cope, but it is still vital to establish from the outset whether this new way of accounting for leases is likely to be appropriate for SMEs."

Mark Venus (BNP Paribas), Chairman of Leaseurope's Accounting Committee

The review, which is currently in progress, will consider the impact and effects of IFRS 16 on lessees and lessors and will scrutinise the following:

• Is IFRS 16 too complex?
• How will IFRS 16 impact the way companies’ uses leases?
• The potential effects of IFRS 16 on competitiveness of European companies
• The potential effects of IFRS 16 on financial stability and the cost of capital and credit

With a particular focus on small and medium- sized business and whether the impact of IFRS 16 makes it suitable for SME adoption. Over 99% of European companies – including virtually all SMEs and most users of equipment and vehicle leasing – utilise national requirements rather than international accounting rules. Most national accounting standards are closely aligned with the international equivalents.

The review is supported by European Trade association Leaseurope, who called for an early analysis of the impact of IFRS 16 on SMEs. Leaseurope has highlighted the problem that implementing new international rules there is always the argument that national standards should change to achieve consistency.

Although the vast majority of SMEs are unlikely to fall under the scope of IFRS 16 until at least 2023, there is support for the commission to determine suitability in advance.

"We are pleased that the Commission by voice of Erik Noteboom, has made clear that it requires independent and objective advice from EFRAG, and advice that is focused on the needs of European businesses. It is important that the costs to SMEs are proportional to the benefits. Whilst the new IFRS 16 standard might be fit for large international groups, Leaseurope fails to see the additional benefit for European SMEs and for their clients and owners."

Leon Dhaene, Director General of Leaseurope

IFRS 16 is no stranger to delays and assessment; we’ve already witnessed two exposure drafts and seemingly countless commentaries since 2006. As this new standard looks to eradicate operating leases and their reporting exemption, resulting in an estimated $2.8 trillion worth of lease commitments coming onto balance sheet, it is no surprise that boards and companies are holding a magnifying glass to the potential impacts.

Whilst we wait for a decision, it is important that businesses are completing their own readiness and impact assessments to highlight how the new standards will likely affect their financial metrics and accounting reports.

To consult a leasing expert about how IFRS 16 will impact your business and find out how Innervision’s lease accounting software is designed to ease the transition, contact us through the link below:

Alternatively, you can call Innervision’s leasing experts and see how our specialised lease management services and software can help you comply with IFRS 16: +44 (0) 20 7283 9422