IFRS: The answer to 5 essential questions
Connector Strategic Partner and expert in Good Governance and Risk Management, Roel Hindriks, answers 5 key questions about IFRS
20 years ago
In 1997, Roel heard for the very first time about an initiative by the Board of International Accounting Standard (IAS) to tackle the off-balance effects of operating lease. The IAS Board had started up discussions around the topic with its American counterpart, US-GAAP, with the long term objective to report liabilities from operating leases in a harmonised way.
Initially, the depreciation of the leased object during the lease period was taken into account as the starting point for the reporting in financial statements. However, for contracts in which the depreciation was relatively small or non-existing (e.g. buildings), this was considered to be insufficient.
This is why the total amount of periodic lease payments was put forward as a better basis for the accounting purposes. To determine the value of future payments, the following elements need to be taken into account: the present value, the applicable interest rate and the periodicity of the payments. In contrast to the payment obligation, the lessee acquires the right to use the lease object and that should also be included in the financial balance sheet as an asset.
Let's take a hypothetical vehicle, leased for 48 months at $1,000 per month (without fuel). According to the principle described above, the IFRS value totals at $48K, which would be an excessive. So... are things different for car leasing? Here are Roel's answers to the 5 essential questions about IFRS.
1. What part of the lease fee enters into IFRS calculation?
Most European full-service leasing agreements include maintenance, repair, road taxes and insurance premiums. Only a minority of lease contracts (so-called unbundled lease contracts), only cover the depreciation, interest and administration costs. In other regions, this is much more frequent.
Therefore, service cost elements need to be deducted from the total lease fee, otherwise there will be illogical differences between the treatment of car lease and other types of leasing.
Operating leases of vans, trucks and special vehicles exclude often services, such as maintenance and repair (net operational lease)
Similarly, in the the case of real estate leases, the costs of taxes, insurance, security and maintenance, are also excluded from the lease fee. Only the nett rent fee counts as the basis for the IFRS processing.