The implications of lease accounting changes : an analysis on the banking industry

Abstract

The current lease standard IAS 17 has been criticised for permitting companies to account for similar transactions in different ways, compelling analysts to adjust for lease obligations not recognised on the balance sheet. In order to overcome this issue, a new lease standard IFRS 16 was issued in January 2016. The most evident change in IFRS 16 relates to the removal of operating leases, such that under the new standard all lease transactions will be shown on the balance sheet. The new standard consequently has various implications on companies. This dissertation examines the main implications of the new accounting standard on the banking industry from three perspectives; the implications on banks as lessees, the effects on capital requirements, and the impact on banks as lenders. Each perspective is analysed through interviews with informed respondents in the light of comparative literature and research. It is evident that the new standard will have a considerable impact on balance sheets, change debt structures, increase administrative burden, alter leverage ratios, and affect the behaviour of companies with lease commitments. Conversely, results from the analysis of the bank as a lessee shows that the changes in the accounting standard are immaterial for the financial statements, given that lease commitments are not significant. The findings from the analysis on capital requirements suggest that although prudential regulators have not commented on the way forward, respondents were fairly neutral to the effects, again given that the amounts are immaterial. Finally, results on the analysis of banks as lenders reveal that debt covenants may be breached, and consequently covenants will need to be renegotiated before IFRS 16 becomes effective in 2019 once endorsed by the EU.