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Buy or lease? GVA explains new changes in lease accounting

Tuesday, 16 May 2017

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One of the biggest changes in lease accounting standards is on its way and will have implications for businesses who lease their property.

The introduction of the new lease accounting standard IFRS 16 will have a significant impact on all companies who rely upon material operating leases as part of their day-to-day business activities.

Leading property adviser GVA held a seminar in Bristol for clients to explain how the changes, which come into effect in January 2019, will impact. They detailed how to navigate through the changes, and why it’s necessary to start taking action now.

Businesses within all sectors, who rely on leasing of business premises, will be required to provision their aggregated rental liability on the balance sheet. This is likely to impact on all companies’ financial performance, who will be reporting on the new changes introduced by IFRS16 after January 2019.

Jerry Burton, Head of Lease Consultancy at GVA explains,
“These are some of the biggest changes to be introduced within accounting for a long time. From January 2019 the separate distinction of operating and finance leases is eliminated for lessees, and most leases will be classed as finance leases. This will require a new lease liability to be recognised on the company balance sheet - covering items from photo-copiers and cars through to property. The new standard represents a significant change from the existing approach and will impact businesses across all sectors that rely on leases as part of their business model.”

The seminar was interactive and turned into a more conducive discussion regarding best practice and how to plan for the changing in the accounting roles.

Stuart Powlesland, Director of Lease Consultancy at GVA in Bristol adds, “It is clear that the majority of attendees had not fully appreciated the extent of the changes and what needed to be planned, especially in relation to lease data, understanding the property market dynamics for applying the discount rate and also how to model the various lease situations.

“These changes will impact on high level strategic property decisions and lease considerations re break options, the impact of rent reviews, turnover rents, RPI rents and rent free periods. There was also a considerable amount of discussion regarding the modelling appraisals, be it the modified approach or the retrospective approach.”

Stuart continues “There is a considerable amount of preparation that needs to be undertaken ahead of the accounting changes and nobody really appreciates these changes and the impact on a company’s viability. One thing that is for sure, is the realisation that property will influence business decisions and will be recognised at board level more so than ever before.”

GVA has developed a financial model which is capable of capturing all the required lease information needed to assess the impact of the transition to IFRS16. The model can look at individual leases as well as providing an overall lease portfolio view. It will also help to appraise the financial metrics involved in making lease vs buy decisions.

To find out more about the new lease accounting standard, please click here.

For more information, contact Stuart Powlesland, Director, GVA, stuart.powlesland@gva.co.uk, Tel: 0117 988 5208.

Jerry Burton
    Jerry Burton
  • Senior Director