Recent changes to accounting rules by the Financial Accounting Standards Board are having a wide reaching impact not just on accounting practices but also on things as fundamental as business models and investments. None Is perhaps more far-reaching than recent changes to how leases and leasing are accounted for. The changes are largely in response to the need to make off-balance sheet leasing obligations more transparent. These changes are not only affecting companies financial reporting but are also affecting whether companies decide to lease or buy to meet their needs for plant and equipment. They are also global as the changes are being implemented internationally as IFRS 16.
The changes mean that after December 15th 2018, companies will need to report all leases and not just capital leases as they did before, causing widespread impact on financial planning for businesses big and small. This is expected to affect over $1.2 trillion dollars worth of transactions in the United States alone. Many companies are struggling now to change their business models so they can implement these changes before the end of next year. Its impact will be far reaching as many industries have grown out of companies needs to play by the former rules.
One industry where this is having a profound impact is information technology. Where companies once had the possibility of leasing IT equipment and software and keeping it off-balance sheet, with the new accounting standards this will no longer be possible. This is expected to accelerate the shift of companies getting their IT support from the cloud as receiving your IT as a service will keep liabilities to a minimum. Companies that specialise in moving services to the cloud will greatly benefit from these changes while those that have made their money by leasing IT equipment will lose out. You may see many more companies in the cloud space as those that traditionally made their money by leasing IT equipment adapt by creating their own data centres and offering it now as a managed service.
Another industry where the impact will be found is the transportation sector. Airlines have benefitted greatly from the ability to keep aircraft leases off-balance sheet. Trucking and railways have followed similar accounting models as a large part of the business is tied up with having equipment that you use to provide your service. These companies will have to seek new and creative ways to model their business or suffer the difficulties of having large liabilities on their balance sheets. Similarly companies that have been created to lease transportation equipment will need to adapt their business to suit the changing environment.
Like any change it is not apparent at the outset all of the changes that will take place. Business is if anything pragmatic and creative and no doubt we will see many adaptations and new models of doing business. Just like the narrow staircases of Amsterdam created a whole industry of verhuislift huren to allow people to move large objects to the upper floors, the narrowing of the accounting rules will create whole new industries designed to help companies adapt to the rule change and keep their balance sheets from being weighed down with liabilities.
Director of Accounting for Private Educational Institutions at Jefferson+Partners (Sydney) from 2007-2015. Founded and led Lebrau & Partners Pty. Ltd. from 2015 until now - a boutique accounting firm serving educational institutions across the Asia Pacific (both public and private, primary, secondary and tertiary institutions).
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