In recent years, the purchase of valuable holdings like hotels, shops, planes, ships and trains has been made possible for businesses by operating leases. Businesses found this method favourable as current accounting standards doesn’t require companies to report these assets on their balance sheet. However, starting 1st January 2019, that will no longer be the case.The new IFRS 16 requires all lease contracts to be reported as “liabilities” in company accounts and cannot be hidden anymore.
In case you are wondering how the new IFRS 16 will affect you, here is another item that’s included in that list of assets: offices. Organisations that don’t own the majority of their workspaces acquire them on lease via long-term contracts.These organisations will be required to declare all those liabilities starting January2019. Balance sheet of companies with real estate as one of their biggest outlays will be significantly affected and their level of borrowing may significantly increase as a result of the new accounting standard.
What does this mean for your company?
What this means is that it’s time for companies to reappraise their leasing portfolios. Experts believe that the new IFRS 16 standard, in its current format, will move businesses away from the long-term lease. It will shift them towards flexible, short-term workspaces that the new accounting standard doesn’t cover.
IFRS 16 standard has been coming for a long time. An important provision for property occupiers or tenants of property is that there won’t be any distinction between financial leases and operating leases anymore. They all must now be reported as lease liabilities. However, there’s an exception – short-term leases (i.e. whose duration is less than one year) are exempted, provided there isn’t any built-in option for buying the asset when the term ends.
PwC has suggested that services firms, which mainly lease cars and offices, will experience an average 42 percent rise with their level of debt after the IFRS16.
So, what implications does the IFRS 16 have for the office market? Well, anybody leasing offices now will find the accounting process a lot more complex than it was before the new accounting standard. For example, multinational firms that mostly lease offices at a local-country level will have to compile all the information across currencies, languages and borders so it can be fed into the global accounts.
The general consensus is that companies will now look for short-term leases to ensure that the liabilities on their balance sheet stay low.
Time for a Clean Up!
In a nutshell, the new accounting standard provides an opportunity for companies to become clean and carefully decide which assets they should own and which ones they should lease traditionally. Companies should select flexible solutions for minimising the impact on their balance sheet to keep both investors, tax man and banks on side.
For more information and assistance with selling your commercial property investments and short term leasing, contact Stonelink International, London’sReal Estate Broker, on + 44 (0) 207 993 4081 and by email info @stonelinkinternational.com.