Get ready to apply new accounting rules on leases: EY

Companies should be prepared for the challenge a new set of accounting rules relating to leases will require, said accounting giant EY.

It warned that companies "should not underestimate the effort to implement these changes", which come into effect in January 2019, while also communicating the impact to stakeholders.

EY told The Straits Times that complying with the IFRS 16 Leases will involve more than just the finance department. "A company's purchase and administrative systems and processes will most likely have to be overhauled as well," said Mr Chiang Joon Arn, Asia-Pacific managing partner at EY Financial Accounting Advisory Service.

The rules on IFRS 16 Leases, which were released by the International Accounting Standards Board last month, could add almost US$3 trillion (S$4.2 trillion) to corporate balance sheets worldwide.

The idea is to provide investors with a more accurate picture of a company's liabilities by including leases in their books, be it real estate, large equipment or vehicles.

Some leases are now classified as "operating leases" and do not appear on a firm's balance sheet but are disclosed only in the footnotes to the financial statements. Those classed as "finance leases" are reflected on the balance sheet.

GREATER TRANSPARENCY

With the new rules, they're on the balance sheet. Analysts and investors won't have to do their own calculations, based on the footnotes. It's more transparent.

MR SHARIQ BARMAKY, assurance and advisory partner at Deloitte Singapore, referring to operating leases.

Critics say using "operating leases" lacks transparency, making it difficult for investors to compare firms. "With the new rules, they're on the balance sheet. Analysts and investors won't have to do their own calculations, based on the footnotes. It's more transparent," said Deloitte Singapore assurance and advisory partner Shariq Barmaky.

The importance of operating leases was highlighted in a document by the International Financial Reporting Standards (IFRS) last year. Bookseller Borders, which filed for bankruptcy in 2011, had US$2.8 billion in off-balance sheet leases - about seven times its reported debt of US$379 million. Under the new IFRS 16, such leases will have to be reported in a company's books.

"Most companies understand that going forward, they will bring more off-balance sheet operating leases into their balance sheets and show higher gearing ratios and asset bases," said Mr Chua Kim Chiu, chairman of the Institute of Singapore Chartered Accountants' Financial Reporting Committee. He added that entrepreneurs starting a new business using leased premises and equipment should understand how the new standard will impact their income statement.

The IFRS 16 Leases will likely have a greater impact on industries such as the airline, retail and transport sectors, which tend to have significant operating leases.

A version of this article appeared in the print edition of The Straits Times on February 11, 2016, with the headline 'Get ready to apply new accounting rules on leases: EY'. Print Edition | Subscribe