Fremtidens leasingstandard: Ændring af IAS 17 - Leases

Martin Langhoff Hansen

Student thesis: Master thesis

Abstract

The topic of this thesis is accounting for leases under IFRS. For a number of years, leasing has constituted a significant source of financing for the business sector in connection with acquisition of assets as an alternative to more traditional sources of financing. As leasing has become more and more popular, general public focus has increased on the accounting treatment of this type of contracts. The reporting standard has met with a good deal of criticism, especially as regards the classification according to which some leases are not recognised in the balance sheet but only disclosed in the notes to the financial statements. In the current version of the standard, leases are classified as finance or operating leases where only the former is recognised in the balance sheet. Based on this, IASB and FASB have chosen to develop a new common reporting standard as a part of their convergence project. The primary purpose of a new standard is to develop a new model for the treatment of leases so that overall all leases are treated in the same manner in the financial reporting. The main purpose of this thesis is to identify why proposals have been made to change the current lease standard, and what a future standard should include to meet the requirements of the readers of financial statements. Finally, the thesis aims at analysing how standard amendments will affect the financial reporting. Initially, the thesis will describe how leases should be treated under the IFRS framework and how leases are treated under IAS 17 Leases. The thesis will moreover make an evaluation of IAS 17 based on which it appears that the standard is subject to a number of weaknesses; eg the definitions of assets and liabilities of IAS 17 are not in accordance with the IFRS framework. Consequently, it is necessary for the readers of financial statements to adjust the financial statements in order to recognise all assets and liabilities, just as the standard gives rise to non-comparability and non-transparency for the readers. The thesis considers the standard to be too complex and at the same time it provides the possibility that the presenter of the financial statements may structure its leases to obtain a certain treatment for accounting purposes. Based on the weaknesses found in the standard, a new standard has been developed on the basis of the analysis of the thesis based on IASB’s exposure draft of August 2010 and selected responses from stakeholder groups. A new standard will apply a one-tier ”right-of-use” model under which all leases should be recognised in the balance sheet. The thesis determines how liabilities should be calculated by establishing the term, payments and discount rate of the contract so that the liability reflects the actual conditions of the contract. Hereafter, the thesis performs an empirical analysis the purpose of which is to establish the implications of the new ”right-of-use” model. The analysis is performed on Danish companies listed in the C20 index. The analysis shows that particularly transportation and logistics companies are affected by an amendment of the lease standard. Interest-bearing debt markedly increases which can also be seen from the related ratios for solvency, financing, gearing and interest-bearing debt/EBITDA. Moreover, the EBITDA of the companies will be affected as the subtotal increases as future lease expenses will be recognised as depreciation and financial expenses instead of ordinary operating costs. This will have a positive effect on the profitability ratios ROE and ROIC. Overall, the general thesis conclusion is that a newly developed standard will improve the financial statement presentation of leases compared to the present IAS 17 standard. A new standard will increase the quality of financial disclosures as well as the comparability for readers of financial statements. However, an immediate remaining disadvantage is a certain complexity in the accounting treatment, just as in its present form the standard cannot be applied for intangible assets

EducationsMSc in Auditing, (Graduate Programme) Final Thesis
LanguageDanish
Publication date2012
Number of pages85