In IFRS lease accounting, there has been a serious change for lessees since 2019. Because these are now obliged to depict all lease contracts, apart from a few exceptions, in the balance sheet as a lease liability. In contrast, a right of use is shown on the asset side. This should result in a stricter obligation to reflect the future payment obligations of companies. However, the presentation of lease contracts at the lessor does not change. This is still referred to as operating and finance leasing. Furthermore, the latter accounting takes place in the HGB. We investigate the consequences for lessors and lessees.

First of all, it can be said about an accounting according to IFRS that this differs significantly from the commercial accounting according to HGB. The IASB (International Accounting Standards Board), which publishes IFRS, is an independent private standard-setter for accounting. For all accounting topics, standards (case law) determine to what extent these are to be observed and treated in accounting. In Germany, IFRSs are currently only mandatory for capital market-oriented companies. This should make internationally active companies comparable to each other on the stock exchanges and capital markets. The mandatory information for all companies in Germany results from the general provisions of the HGB (Code Law), which are prescribed by the legislature. In addition, accounting must adhere to the principles of proper accounting (GoB) and, since 2017, the principles of proper accounting and documentation (GoBD).

Now to the two most important differences between IFRS and HGB accounting. IFRS accounting clearly focuses on fair value accounting. Thus, an orientation to present and current values for assets is to be ensured. In comparison, HGB accounting basically focuses on past values. In addition, the interests of creditors and the security of their payments are often protected. IFRS, on the other hand, focuses on investor interest and the forecast of secure net payments to them. Thus, this concern was now also the goal in the introduction of the new standard for leasing objects, IFRS 16, and is represented by additional mandatory information in the balance sheet.

In the case of leasing, the lessee is contractually granted a temporary right of use in a leased object for consideration, usually a fee. The full purchase price is not immediately paid to the lessor, i.e. the owner.

In leasing, the biggest problem is that it is often uncertain to which of the parties to the contract the asset is economically attributable. In principle, the entire accounting of leased items is based on IFRSs. As has just been explained in the definition of leasing, the lessee receives only a temporary right of use, which leaves the question of economic allocation open. Due to this uncertainty, companies often had more or less a right to vote in the accounting of leasing according to IFRS in the past.

Until now, items and the payment obligation from them did not appear on the balance sheet, for example, if a company decided to lease cars instead of buying them. In accordance with the outdated IAS 17 standard, companies could choose whether the subject matter falls within the scope of operating leasing or finance leasing. It was a question of the opportunities and risks of the parties involved in the asset or its future payments. Finance leasing here corresponds to a leveraged purchase of a leased object. Accounting was therefore inevitable. On the other hand, operating leasing was equivalent to rent, so it did not have to be recorded on the assets side and on the liabilities side of the balance sheet. Consequently, a reference in the annex was sufficient. This was also very often chosen by companies in order to show better balance sheet indicators. More on that later. Professional analysts were well aware of this practice, so they could add the lease payments afterwards.

According to the new IFRS 16 standard, nothing changes for accounting at the lessor. A distinction is still made between Finance and Operating Leasing. Therefore, the focus here is on the lessee.

Now this is clearly different for the lessee than for the lessor. In future, this will no longer refer to finance and operating lease, but to an obligation to activate any lease liabilities, with few exceptions.

Since the lessee has secure external obligations in the future through his obligatory lease agreements, liabilities have to be shown in the balance sheet according to IFRS since 2019. At the same time, however, the lessee must also activate a so-called right-of-use asset, i.e. a right of use. It should be noted that the rights of use are accounted for with the present value of the outstanding lease payments. This means that future lease payments under IFRS are discounted at an interest rate. Frequently, the company’s marginal interest rate is used.

Now, when calculating the present value, it is questionable which payments are considered “obligatory” over the term of the contract. Always safe under the term is a non-cancellable basic term of the lease and possibly agreed extension options. However, it must be relatively safe to assume an extension by the lessee. There is often scope for discretion, but in the case of favorable economic extension options, this is still considered very likely. As a result, the amount of the follow-up rental is often included in the lease payments to be accounted for if it is more favourable than market conditions. Furthermore, you can add penalties on termination of the lease as well as the price of a purchase option. However, a call option by the lessor does not allow for lower accounting.

Accounting for leased items in accordance with IFRS 16 causes accounting changes for many companies. However, since the extension of the balance sheet concerns the positions of liabilities and the assets of the fixed assets held in the company over the longer term, this has rather negative accounting consequences. For example, the debt ratio and the interest burden increase, and logically the equity ratio decreases. Furthermore, ancillary agreements agreed in credit agreements, so-called covenants, can be influenced, since this is often based on the equity ratio. In the future, it will be particularly important for companies to make arrangements with lenders at an early stage that take account of a change in these balance sheet indicators due to the lease agreements.

In addition, many companies do not have an overview of the current lease contracts, they are simply extended further and further, often on similar terms as the previous contract. This was particularly complex with the conversion to the IFRS 16 standard introduced in 2019. Because now it was necessary to first review all existing lease contracts and also to evaluate them and, if necessary, re-evaluate them. Often this was associated with high organizational costs, especially in the case of the contracts currently under operating lease, as these were newly entered into the balance sheet. Nevertheless, it is also possible to generate savings potential by old contracts leading to newer conditions, which could also lead to a reduction in the actual lease costs associated with lower interest rates.

It is also important to note that the change in the standard according to IFRS 16 could have an impact on HGB accounting. Because the change in IFRS also increases the pressure on the legislator in German commercial law to possibly adjust the balance sheet regulations. In addition, this has an enormous impact on subsidiaries of listed companies, as they are used for the conversion or relocation. Introduction to an IFRS balance sheet must also inventory and properly measure the leased items. This will be inevitable for the publication of the IFRS consolidated financial statements in the company register. Thus, especially for holding companies, additional effort will arise through the new regulation.

Furthermore, it is possible to use an off-balance accounting according to IFRS 16 for certain lease items. Because leasing contracts with a contract term of less than 12 months are excluded from the new standard. However, the accounting policy margin for this exception is considered relatively small.

In addition, IFRS 16 grants a small exemption for leased items below a value of 5,000 euros. Because these still do not have to be included in the balance sheet. However, when it comes to very large sums of money, as is the case with leasing aircraft, ships or buildings, companies are no longer left any room for manoeuvre. Because these are usually below the specified exemption limit.

Nevertheless, there is still a relatively high scope for larger lease volumes for the specified exemption, which are expected to be passed on to their customers for off-balance accounting at lower prices. The economic actions of both parties are likely to create shapes precisely in these loopholes.

Furthermore, one of the main reasons for criticism of the new standard is the distinction between accounting between lessee and lessor. As a result, there can be a double counting of values in the balance sheets, resulting in over-representation of assets. It is interesting to see whether this will be adapted in the future.

Since many companies have often designed their leases in such a way that this off-balance is presented, the new standard should now prevent this. However, due to the two loopholes already mentioned, lessors will continue to want to offer their customers an off-balance accounting as much as possible. It was precisely the goal of the new standard to depict high liabilities of companies and no longer to hide them. However, the desired goal is expected to be achieved in industries with high leasing values, such as ships or aircraft.